27 April 1992 Roundtable, 9211090 F - Interest & property tax on land and during construction

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.

April 27, 1992

PRAIRIE TAX CONFERENCE

May 19 & 20, 1992

DRAFT/EBAUCHE

Question 20

In a situation wherein land has been acquired by a taxpayer, whose ordinary business is holding land as inventory for the purpose of resale or development, interest and property taxes relating to the acquisition of the land would be capitalized and added to the cost of inventory by virtue of subsection 18(2).  If a condominium project is constructed on a portion of the land, interest and property taxes incurred with respect to the construction of the condominium project and to the ownership during that period of the land as described in subparagraph 18(3.1)(a)(i) or (ii) would be capitalized and added to the cost of building by virtue of subsection 18(3.1).  After the construction of the condominium project is completed, subsection 18(3.1) would not have any further application.  Please confirm that while the unsold completed condominium units are held by the taxpayer as inventory in the course of its land development business, the taxpayer would be required to capitalize and add to the cost of inventory only interest and property taxes relating to the acquisition of the land by virtue of subsection 18(2).

Department's Position

In the above-noted situation wherein the unsold completed condominium units are held by the taxpayer as inventory in the course of its land development business, by virtue of subsection 18(2) and subparagraphs 18(3)(a)(ii) and (iii) the taxpayer would not be required after the completion of the condominium project to capitalize and add to the cost of inventory interest and property taxes, that relate to the acquisition of the portion of the land which is subjacent to the condominium building or which is a parking area, driveway, yard, garden or similar land that is necessary for the use of the condominium building.  However, interest and property taxes with respect to the acquisition of the other portion of the land which is not subjacent to the condominium building and is not a parking area, driveway, yard, garden nor similar land that is necessary for the use of the condominium building, would be continuously subject to the application of subsection 18(2) before, during and after the completion of the condominium project.  Furthermore, if the taxpayer developed the condominium project as an adventure in the nature of trade, any interest and property taxes incurred before, during and after the completion of the condominium project with respect to the condominium building and the related land would be capitalized as costs that would only be deducted by the taxpayer at the time when the condominium units are sold or otherwise disposed of by it.

Author:   Peter Lee

Statement of Principal Issues

Re:  Interest and Property Taxes on Vacant Land Interest and Property Taxes Incurred during Construction Prairie Provinces Tax Conference - Round Table (Q.20)        

Background

In a situation wherein land is acquired as inventory of a taxpayer, interest and property taxes relating to the acquisition of the land would be capitalized and added to the cost of inventory by virtue of subsection 18(2).  If a condominium project is constructed on the land, all interest and property taxes incurred with respect to the construction of the condominium project and to the ownership during that period of the land as described in subparagraph 18(3.1)(a)(i) or (ii) would be capitalized and added to the cost of building by virtue of subsection 18(3.1).  After the construction of the condominium project is completed, subsection 18(3.1) would not have any further application.

Issue

While the unsold completed condominium units are held by the taxpayer as inventory, would the taxpayer be required to capitalize and add to the cost of inventory only interest and property taxes relating to the acquisition of the land by virtue of subsection 18(2) (i.e. excluding interest and property taxes relating to the condominium building)?

Position Taken

Under subsection 18(2), a taxpayer is required to capitalize to the cost of inventory interest and property taxes relating to the acquisition of land.  Under subsection 18(3.1), a taxpayer is required to capitalize to the cost of a building interest and property taxes incurred during the construction period that relate to the construction of a building or the ownership during that period of land as described in subparagraph 18(3.1)(a)(i) or (ii).  After the construction of the building has been completed for the purpose of subsection 18(3.3), subsection 18(3.1) will no longer be applicable.  By virtue of subsection 18(3), the term "land" does not include any property or land as described in subparagraph 18(3)(a)(i), (ii) or (iii) for the purpose of subsection 18(2) in capitalizing interest and property taxes relating to the acquisition of land. 

In the case at hand, after the completion of the condominium project, subsection 18(2) would generally not be applicable to the condominium building, the land subjacent to the condominium building or the land that is a parking area, driveway, yard, garden or similar land that is necessary for the the use of the condominium building, because the term "land" for the purpose of subsection 18(2) does not include such condominium building and related land.  Whether interest and property taxes relating to such condominium building and related land would be deductible as current expenses (i.e. under sections 9 and 10) depends on whether the condominium project has been developed in the course of a land development business or as an adventure in nature of trade.  If the condominium project has been developed as an adventure in the nature of trade, all interest and property taxes must be capitalized and added to the costs (i.e. but they are not costs of inventory nor costs of capital property) and they would become a part of the cost of sale at the time when the condominium units are sold or otherwise disposed of.  (See the case of Jake Friesen, 92 DTC 6248 (FCTD); see also paragraph 12 of Interpretation Bulletin IT-153R3 and the memorandum of D.S. Delorey dated May 5, 1986 (#7-0364).)   In light of the court decision in the case of Jake Friesen, our comments in paragraph 12 of IT-153R3 dated October 7, 1991 that "the amounts added to the cost of inventory of land may only be deducted when the land is disposed of" should be modified to replace the expression "cost of inventory" with the word "cost".  We will bring this to the attention of Publication Division.  On the other hand, the land which has been acquired but has not been used for the construction of the condominium building and other related purposes, will be continuously subject to the application of subsection 18(2) before, during and after the completion of the construction.