1 December 1989 Income Tax Severed Letter 58343 F - Treatment of Interest Related to the Acquisition of Land

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.

Dear Sirs:

RE:     Subsection 18(2) of the Income Tax Act;

We are writing in reply to your letter of June 29, 1989 concerning the treatment of interest related to the acquisition of land. In your letter you requested our comments related to the following questions:

1)      Where $1 million in cash is used by a corporation to acquire land and another $5 million is borrowed to install services. given that no buildings are constructed and the serviced lots are for resale, would the interest related to the funds borrowed to install the services be deductible in accordance with paragraph 20(1)(c) of the Income Tax Act (the "Act") or restricted by section 18(2) of the Act.

2)      Where a taxpayer acquires a parcel of land which is subsequently subdivided into 100 lots, four of which are sold in the year, could the profit on the sale of those four lots be used to reduce the non-deductible interest and property taxes on the remaining lots on the basis that "land" in paragraph 18(2)(e) of the Act refers to the entire parcel and not a specific lot.

3)      Where a taxpayer sells a lot which includes installed services some of which will be installed subsequent to the sale of the lot, would the taxpayer be entitled to claim a reserve under paragraph 20(1)(m) of the Act related to the future services to be rendered after the taxpayer's year-end.

Our Comments

We offer the following comments relating to the above questions:

1)      The legal definition of land includes any items of a permanent nature found on the earth or attached to it. As services added to the land would clearly meet the legal definition of land, the deductibility of Interest on any debt related to the acquisition of services would be restricted by section 18(2) of the Act unless the services were specifically excluded from the definition of land pursuant to subparagraph 18(3)(a)(i) of the Act. In our opinion. where the land is held for resale. the services which are added to the land in anticipation of resale will not be excluded from the definition of land by subparagraph 18(3)(a)(i) of the Act. paragraph 5 of Interpretation Bulletin IT-153R2 states that "the Department's view is that a taxpayer has acquired a building or other structure' within subparagraph 18(3)(a)(i) at the time when site development begins" and paragraph 6 of IT-153R2 states "where serviced lots are acquired site development is considered to begin at the earlier of the date the taxpayer starts to install further services to the lots or the date he starts to pour footings". Thus, site development may be regarded as the acquisition of a building or structure in the limited circumstances described in the bulletin. It therefore follows that subparagraph 18(3)(a)(i) of the Act does not exclude the services added by the initial developer from the definition of land.

2)      In our opinion. the statement "gross revenue, if any from the land" contained in paragraph 18(2)(e) of the Act does not include revenue from the sale of land. The statement refers to revenue from the use of the land such as revenue from the lease, rental, farming, or carrying on of a business on the land. As such revenue from the sale of land could not be used for the purposes of allowing a deduction pursuant to paragraph 18(2)(e) of the Act. In addition, revenue from the lease, rental, farming, or carrying on a business on one lot will not be considered to be revenue related to the ownership of the other lots. The expenses that relate to a particular lot can only be deducted from the net income from that lot and not against the net income of any other lots which the taxpayer may own. To the extent that there is insufficient income from that particular lot the remainder must (subject to the provisions of paragraph 18(2)(f) of the Act) be added to the cost of that lot.

3)      Generally where land is sold by a taxpayer in the course of his business and the proceeds of disposition are in part payment for the land sold and in part a repayment for future services, paragraph 20(1)(m) of the Act will apply to allow a reasonable reserve provided the following conditions are met

a)      The costs to be incurred by the taxpayer after the taxpayer's fiscal year end can be identified.

b)      The revenue related to the services has actually been received by the taxpayer prior to his fiscal year end.

c)      The revenue related to the services has been included in the taxpayer's income pursuant to paragraph 12(1)(a) of the Act.

We trust that our comments will be of assistance.

Yours truly,

R.E. Thompsonfor DirectorBusiness and General DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch