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 the disposition of a property would be on account of income or capital.
Position: General comments provided.
Reasons: Question of fact
XXXXXXXXXX
2013-050131
Charles Rafuse
613-247-9237
August 27, 2013
Dear XXXXXXXXXX:
Re: Income or Capital in Nature
This is in response to your letter of May 9, 2013, to the XXXXXXXXXX Tax Centre, concerning your request for our views on whether a gain from the sale of certain property you own would be treated on account of income or capital for income tax purposes.
Briefly, you indicated that you purchased some land with the intention of using most of it for a proposed business venture while keeping a smaller portion for your residence. However, you indicated that since the cost of servicing the land for your planned business venture proved to be too prohibitive you decided to have all the land rezoned and sub-divided into XXXXXXXXXX residential building lots. Your current plan is to sell XXXXXXXXXX of the lots and keep XXXXXXXXXX for your residence.
Our Comments
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, "Advance Income Tax Rulings", dated May 17, 2002. However, as indicated in paragraph 15(e) of IC 70-6R5, we will not provide a ruling where the major issue is whether a transaction should be viewed as being on account of income or capital. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the internet at http://www.cra-arc.gc.ca/formspubs/menu-e.html. However, 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 comments that may be of assistance.
Whether in a particular situation a gain or loss from a sale of real property should be treated as being on account of income or capital for the purposes of the Income Tax Act ("Act") is a question of fact to be resolved based on a complete review of all the facts and circumstances of the particular situation.
There are publications produced by the CRA that provide guidance on factors that should be considered in establishing whether a particular gain is on account of capital or income. In this regard, you may wish to consult 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," and Interpretation Bulletin IT-459, "Adventure or Concern in the Nature of Trade".
As mentioned in paragraph 3 of IT-218R, there is no provision in the Act which describes the circumstances in which gains from the sale of real estate are to be determined as being on account of income or capital. However, in making such determinations, the courts have considered different factors such as those explained in IT-218R. The issue generally involves a determination of the facts of each case. No one factor is conclusive; however, the taxpayer's motivation in obtaining the property is usually significant. We would mention that the criteria explained in IT-218R are similarly applicable in determining whether a real estate loss is on account of income or capital.
We trust that these comments will be 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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