11 May 1993 External T.I. 9302065 F - Subdividing Land for Sale

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.

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Attention:  XXXXXXXXXX

Dear Sirs:

RE:  Sale of Land After Subdividing

This is in reply to your letter of January 19, 1993 wherein you requested our opinion as to whether land which is a capital property, used by its owner for purposes of producing income from a business, converts to inventory as a result of a plan to subdivide where the owner has no plans to proceed with a development of the subdivided land, but will sell after the subdivision has been approved by the local authority.

You referred to paragraph 12 of Interpretation Bulletin IT-218R (the "IT") which states that vacant land that is a capital property used to produce income will be considered to have been converted to inventory at the time of making application to subdivide the lands into lots for sale, provided that the taxpayer proceeds with the development of the subdivision. You also point out that paragraph 24 of the IT states "it is the Department's view that the filing of a subdivision plan and selling lots thereunder does not in itself affect the status of the gain notwithstanding the subdivision may enhance the value of such land." These comments relate to farm land and inherited land and you feel that they should also apply to the situation at hand in that you believe that the act alone of subdividing the capital property does not change its status to inventory.

Our Comments:

Paragraph 24 of the IT goes on to state that where the taxpayer goes beyond mere subdivision of the land into lots and installs improvements such as watermains, sewers or roads, or carries on an extensive advertising campaign to sell the lots, the taxpayer will be considered to have converted the land from capital property into a trading property.

It would seem that making application to the relevant authority for approval of a plan to subdivide land into lots is only the first of many events in the development of a subdivision. In our view, the mere subdividing of land, in the absence of some of the improvements mentioned in paragraph 24 of the IT, does not result in the development of a subdivision as required in paragraph 12 of the IT.

Whether a property is a capital property at a particular time is a determination of fact to be made based on all of the circumstances of a transaction, including the intention at the time of purchase and the manner in which it is disposed off. In our view, where a property is a capital property, in the absence of plans to proceed with the development of a subdivision, making application to the relevant authority for approval of a plan to subdivide would not, in and by itself, cause the property to be considered as being converted to inventory.

Nothing in our comments should be construed as relating to whether the property is or is not a capital property. The comments are offered on the basis that it is a capital property and are given in accordance with the practice of providing opinions referred to in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990 and are not binding on Revenue Canada, Taxation.

We trust that you will find our comments helpful.

Yours truly,

R. Albert for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch