4 March 1994 Internal T.I. 9321217 - SALE OF BURIAL PLOTS

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

							March 4, 1994

Toronto District Office Manufacturing Industries,
Business Enquiries Group Partnerships and Trusts
Audit Division Division
Section 443-6-6 C.R. Brown
613 957-8953
Attention: Anne Marie Long

		                             932121

XXXXXXXXXX

This is in reply to your memorandum of July 11, 1993 concerning XXXXXXXXXX We apologize for the delay in replying to this request.

XXXXXXXXXX

The issues addressed in your memorandum involve the cemetery operations and the income tax treatment of dispositions of developed and undeveloped cemetery land.

Specifically, you have requested our views on the following matters:

1)Is developed and undeveloped cemetery land an item of inventory in the taxpayer's cemetery business for the purposes of the Income Tax Act (the "Act")?

2)If the cemetery land is an item of inventory in the taxpayer's business and in view of the unique nature of this business, is the taxpayer a "land developer" for purposes of subsection 18(2) of the Act?

3)If cemetery land is not an item of inventory then it is capital property. If cemetery land is a capital property then,

(i)is a deduction for depletion of this asset permitted under the Act, and

(ii)if a deduction for depletion is permitted are there any implications for an adjustment which recognizes the disposition of cemetery land as a depreciable asset? For example, in the resource industry the proceeds of disposition of a resource property reduce the cumulative Canadian development expenses, with inclusion in income if the sale causes the cumulative expenses to be in a credit balance. You note that the absence of such an adjustment provides the cemetery industry with a tax advantage not available to other taxpayers who deal in land.

In support of your memorandum and the District Office opinion you included a detailed analysis of the issues and legal precedents. You also included a similar presentation of analysis and precedents prepared by the taxpayer's lawyers in support of the taxpayer's position. This information was very helpful in understanding these issues. However, it is not our intention to repeat the various arguments in this reply.

To our knowledge, this Department has not considered these issues in the context of a cemetery operation which we understand involves the commercial sales of burial plots and annual earnings from perpetual care. Although we appreciate the uniqueness of this operation, we do not think that this in itself is sufficient to adopt special rules for the calculation of inventory and profits nor does the Act provide for any such rules. For this reason, we do not accept the comparison made with the resource industry which requires a special regime within the Act to deal with profits and taxation. There are no special rules for the cemetery industry and we must make do with the normal tax rules.

It is apparently agreed between the District Office and the taxpayer that the cemetery lands are not sold when a burial plot is sold. What is sold is a right of interment which is similar to an easement. It might be said that the cemetery operator is a dealer in such "easements". When put in this context, the issue seems to be what is the legitimate inventory cost and cost of sales of a particular "easement". The Department recognizes that the granting of an easement represents a partial disposition of the ownership rights associated with land. However, identifying the cost of what is sold presents significant problems and hence the Department administratively has accepted that where the easement is granted in respect of a capital property the proceeds can be used to reduce the cost of the property (land), in effect deferring any gain or loss to the future. Unfortunately, this does not answer for the situation in which the taxpayer is a dealer in easements and holds them as inventory since the Act requires that the inventory and cost of sales be accurately determined.

To put this in perspective with respect to the land cost, the question to be answered is whether on a sale of the burial plot the value of the land held is diminished in anyway. Although this seems to be a question for the Department's real estate evaluators, one approach might be to determine in today's terms what the value of land would be to a willing buyer if all the burial plots were sold and the buyer must seek its profit from the perpetual care operations. This would be compared against original cost of the land in today's terms to see percentage-wise what portion of the land cost, if any, can be considered to be "disposed of" or "absorbed" in the sale or creation of the burial plot. The inventory cost could then be calculated by using the appropriate cost associated with the original land cost plus the costs incurred in the creation of the burial plots. Of course the normal inventory rules of section 10 of the Act would also apply and may effect the amount claimed. Since this is a matter of valuation, we recommend consultation with our valuation staff.

Another question that needs to be considered is whether or not the fact that the taxpayer holds the easement as inventory is sufficient to characterise the land itself as inventory. If such is the case, would land held, which is presently surplus to land needed for burial plots, be characterised as inventory. While this issue is certainly not clear, it is our view that all of land held for direct use in the cemetery operations is a capital property of the business. The reason for this view is that it appears to us that it is arguable that the cemetery operator is dealing in burial rights and that this property/right can be distinguished for inventory purposes from the land which creates it.

The land which is surplus to the business may be held either as capital property or as inventory for sale. This determination would depend on the circumstances. This issue would have to be determined on basis of the facts in each situation including why the excess land was acquired and why it is being disposed of. In reviewing the examples set out in your submission, it appeared to us that in most cases the Department has a respectable argument that the taxpayer always intended to sell off excess land not required by the projected need for burial plots based on regional demographics. Such land could be viewed as being held for sale since the time of acquisition and consequently would not be a capital property. In a case where the land was considered needed in the cemetery operation but later it is determined that this is not the case, capital gains treatment may be appropriate.

In view of this analysis our reply to your specific questions are as follows.

1)Developed land would not be inventory but undeveloped land could be either inventory or capital depending on the specific facts.

2)The cemetery corporation is not a "land developer" within the sense implied by the following words in paragraph 18(2)(c) "...a business in the ordinary course of which land is held primarily for the purpose of resale or development,...". The argument being the taxpayer is creating an "easement" and not developing land.

3)(i)As you know, there is no statutory provision that would allow a depletion deduction in respect of land to cemetery operators. However, as you will note in our comments above, we believe that it would be reasonable to assume that some portion of the cost of the land attaches to the "easement". We have also suggested a method of determining that cost.

(ii)Proceeding on the basis of the allocation of a portion of the land cost to the "easements", it is our view that the cost of the land would be similarly reduced for the purpose of determining any gain or loss from a future disposition of the land.

In view of the lack of any precedents dealing with cemetery operations under the Act, our views are our best effort at interpreting the Act as it applies to cemetery operations.

XXXXXXXXXX

for Director
Manufacturing Industries, Partnerships
and Trusts Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch