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: Where a pension corporation acquires land to develop a shopping centre and a portion of the land is subdivided and subsequently sold, cause the conditions of subclause 149(1)(o.2)(ii)(A)(I) to fail to be satisfied?
Position: Question of fact.
Reasons: Real property acquired by the pension corporation must be held, at all times, as capital property. The development of real property for the purpose of earning passive investment income is acceptable; however, developing real property for the purpose of reselling it at a profit would not be acceptable. All of the relevant facts in a particular situation would have to be known to make such a determination.
XXXXXXXXXX
2013-049064
G. Allen
March 5, 2014
Dear XXXXXXXXXX:
Re: Paragraph 149(1)(o.2) Improving and Developing Real Property
This is in reply to your letter sent to us on May 27, 2013 concerning our interpretation of paragraph 149(1)(o.2) of the Income Tax Act (the "Act") in the hypothetical situation described in your letter. You describe the hypothetical situation as summarized below and enquire whether in our view the acquisition, subdivision and subsequent sale of the Excess Land, as defined below, would cause a pension corporation to fail to satisfy the conditions of subparagraph 149(1)(o.2)(ii).
* A 149(1)(o.2)(ii) pension corporation (Pensionco) would acquire land (the "Land") to develop a shopping centre.
* Less than 20% of the Land (the "Excess Land") acquired would not be needed for developing the shopping centre.
* Pensionco could not acquire the Land without also acquiring the Excess Land.
* Pensionco would subdivide the Land to create the Excess Land which could result in there being several non-contiguous parcels of land. The Excess Land would subsequently be sold.
* Pensionco would not improve or develop the Excess Land in any manner prior to its sale.
This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R5, Advance Income Tax Rulings.
Our Comments
Subparagraphs 149(1)(o.2)(ii) and (iv) or (v), whichever is applicable, list the conditions that must be satisfied by a pension real estate corporation to be exempt from Part I tax. In general, subclause 149(1)(o.2)(ii)(A)(I) provides that a pension real estate corporation limit its activities to; "acquiring, holding, maintaining, improving, leasing or managing capital property that is real property or an interest in real property owned by the corporation".
As mentioned in your letter, where a pension real estate corporation acquires real property with the intention of developing the real property, we view subclause 149(1)(o.2)(ii)(A)(I) to apply in the following manner. Firstly, the real property acquired by the pension real estate corporation must be held, at all times, as capital property. Secondly, although subclause 149(1)(o.2)(ii)(A)(I) does not specifically refer to developing real property, we are of the view that activities undertaken to increase the investment income earned from the real property, e.g., activities to increase rental income, would be acceptable. In this context, we view the development of real property as being synonymous with the improvement of real property. However, development activities that are undertaken for the purpose of increasing the value of the real property for the purpose of selling the property at a profit would not be acceptable. Whether real property is acquired as capital property with the intention of holding it for the purpose of earning passive investment income, or acquired with the intention of reselling it at a profit is a question of fact.
In the hypothetical situation you have described, it would be a question of fact whether the Excess Land has been acquired by Pensionco as capital property. In this regard, we would refer you to IT-218R for information concerning whether property is capital property (available at http://www.cra-arc.gc.ca/E/pub/tp/it218r/). Whether Pensionco's acquisition, subdivision and resale of the Excess Land would constitute developing the Excess Land with the intention of reselling it at a profit, and therefore, not satisfying the conditions of subclause 149(1)(o.2)(ii)(A)(I), would also be a question of fact.
We trust that our comments will be of assistance.
Lita Krantz, CPA, CA
for Director
Deferred Income Plans Section II
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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