Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: Whether a corporate taxpayer has the option to report a gain realized on the sale of a piece of land as partly on account of capital and partly on account of income where the income is computed based on "assessed value".
Position: Not enough information provided in this particular fact situation.
Reasons: According to paragraph 15 of IT-218R, a combination of income treatment and capital treatment may be possible in a situation where the ultimate sale of real estate that was converted from a capital property to inventory.
XXXXXXXXXX
N. Pulandiran
2012-046784
November 29, 2012
Dear XXXXXXXXXX:
Re: Gain on sale of land
We are writing in response to your facsimile of October 30, 2012 concerning whether a taxpayer can, for the purposes of the Income Tax Act (the "Act"), report a gain arising from the disposition of certain vacant land as partly being on account of capital and partly being on account of income.
While we have been provided with very few facts, it appears from your correspondence that a taxpayer has sold, or has agreed to sell, a particular parcel of land to a purchaser for an agreed purchase price that is in excess of its assessed value (presumably for property tax purposes). You also indicate that the purchaser was/is willing to pay substantially more than the assessed value for the land because the purchaser plans to develop the property.
You are essentially asking whether it is acceptable for the taxpayer to treat the portion of the gain relating to the excess of the cost of the land over its assessed value as a capital gain while the excess proceeds of disposition (i.e., the actual purchase price less the assessed value of the land for property tax purposes) as being on account of income.
Our Comments
Written confirmation of the tax implications inherent in particular transactions is provided by this Directorate where the transactions are proposed and are the subject matter of an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, "Advance Income Tax Rulings", dated May 17, 2002. This Information Circular and other CRA publications can be accessed on the internet at http://www.cra-arc.gc.ca/formspubs/menu-e.html. However, as stated in paragraph 15 of IC 70-6R5, a request for an advance ruling may be refused, inter alia, where the major issue is whether a transaction should be viewed as being of an income nature or of a capital nature or where the matter involved is the determination of fair market value of property.
Where a particular transaction has already been completed, a review of the relevant facts and circumstances surrounding the situation would be required. Such review would normally be conducted by the applicable Tax Services Office during the course of an income tax audit which, if undertaken, would be carried out after the particular taxpayer has prepared and filed its income tax return for the year.
Notwithstanding the foregoing, we are prepared to provide the following general comments that may be of assistance.
Whether a gain arising on the sale of land will be considered to be on account of income or a capital gain, or a combination of both, involve questions of fact that can be determined only after reviewing all the relevant facts in a particular situation.
As noted in paragraph 3 of Interpretation Bulletin IT-218R, Profit, Capital Gains and Losses from the Sale of Real Estate, Including Farmland and Inherited Land and Conversion of Real Estate from Capital Property to Inventory and Vice Versa ("IT-218R"), there are no provisions in the Act which describe the circumstances under which in a particular case it can be determined that gains from the sale of real estate are on account of income or capital since each situation must be determined based on the facts. However, the various factors the courts have considered in making such determinations are also set out in this paragraph and, as also noted therein; while no one factor is conclusive the taxpayer's motivation in obtaining the property is usually a significant factor. In this regard, paragraph 5 of IT-218R states":A taxpayer's intention at the time of purchase of real estate is relevant in determining whether a gain on its sale will be treated as business income or as a capital gain. It is possible for a taxpayer to have an alternate or secondary intention, at the time of acquiring real estate, of reselling it at a profit if the main or primary intention is thwarted. If this secondary intention is carried out any gain realized on the sale usually will be taxed as business income."
Further, paragraph 15 of IT-218R describes that a combination of income treatment and capital treatment may be possible in a situation where the ultimate sale of real estate that was converted from a capital property to inventory. As stated in paragraph 12 thereof, vacant land used by its owner for the purpose of gaining or producing income (capital property) will be considered to have been converted to inventory at its fair market value at the time when the owner commences or causes the commencement of improvements to the property with a view to selling it.
While the term "fair market value" is not defined in the Act, it generally is considered to mean the highest price available in an open and unrestricted market, between informed, prudent parties, acting at arm's length and under no compulsion to act and contracting for a taxable purchase and sale expressed in terms of cash.
The fact that an arm's-length vendor and a purchaser may agree on a purchase price for a particular parcel of land that is in excess of its assessed value for property tax purposes will not, in and of itself, mean that the agreed purchase price is not considered to represent its fair market value nor should this fact impact how the particular vendor's gain should be treated for the purposes of the Act.
We trust that these comments have been of assistance.
Yours truly,
Michael Cooke, C.P.A, C.A.
Manager
Business and Capital Transaction Section
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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