27 May 1993 Ruling 9304483 F - Conversion of Use

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:  Deemed Disposition Rules - Conversion of Use

This is in reply to your letter of February 8, 1993 concerning the application of subsection 45(1) of the Income Tax Act (the "Act") as it applies to a taxpayer who constructed a property for sale, but instead leased the property for one year and immediately thereafter, used the property as his personal residence.

Based on the Department's comments in paragraph 21 of Information Circular 70-6R2, we are unable to provide confirmation of the income tax effects of the particular situation. However, we are prepared to offer the following general comments:

Interpretation Bulletins IT-218R and IT-459 set out numerous guidelines used by the Department in attempting to characterize the gain or loss derived from a transaction in real estate.

Paragraph 11 of IT-218R describes that a change from one-income earning function to another is not a change in use for the purposes of paragraph 45(1)(a) of the Act. Consequently, where real estate inventory is converted to income-earning capital property, there is no deemed disposition or reacquisition under paragraph 45(1)(a). However, as explained under paragraph 15 of IT-218R, in such a case, there would be only a notional disposition giving rise to a notional gain or loss but which would have no taxable effect until the year in which the actual sale of the property occurs. Any income gain or loss on the actual sale of such converted property would be determined in accordance with generally accepted accounting principles.

As stated in paragraphs 21 and 22 of IT-218R, a conversion of real estate from inventory to capital property must be permanent and that, among other things, a conversion to a capital asset will not occur if the property is rented only for a short-term.

In a factual situation the onus would be on the taxpayer to substantiate that a conversion of the real estate inventory has occurred for the purposes of the Act. Accordingly, it is our view, based on the above comments, that the temporary use of real estate inventory as rental property would not change the characterization of such inventory to create a change in use for the purpose of paragraph 45(1)(a). A subsequent use of the property as a personal residence would, however, be subject to the provisions of paragraph 45(1)(a) of the Act such that there would be a deemed disposition on conversion from inventory to personal use capital property.

The comments above are an expression of opinion only and are not to be construed as an advance ruling binding on the Department.

We hope our comments will be of assistance to you.

Yours truly,

for Director Manufacturing Industries, Partnerships and Trusts DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch