12 September 1994 Internal T.I. 9404837 - LAND INVENTORY WRITE-DOWNS

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.

				September 12, 1994

	Hamilton District Office		Head Office
				Rulings Directorate
	Attention:  G. Soroka		A.M. Brake
	            Audit Division	(613) 957-8953

				940483

XXXXXXXXXX
Land Inventory write-downs, subsection 10(1)

This is in reply to your memorandum of February 18, 1994 relating to losses claimed as a result of land inventory write-downs by XXXXXXXXXX You asked for our comments in light of the decision in the Friesen case with respect to lands held for development and resale. There has not been any land sales in the years under consideration and neither has there been any development on the lands in question. The ownership of the various parcels of land being as follows:

1) XXXXXXXXXX Land 4) XXXXXXXXXX Land

1/2	XXXXXXXXXX	1/2  XXXXXXXXXX
1/4	XXXXXXXXXX	1/4  XXXXXXXXXX
1/8	XXXXXXXXXX	1/4  XXXXXXXXXX
1/8	XXXXXXXXXX

2) XXXXXXXXXX Land 5) XXXXXXXXXX Land

1/3	XXXXXXXXXX	45%  XXXXXXXXXX
1/3	XXXXXXXXXX	33%  XXXXXXXXXX
1/3	XXXXXXXXXX	22%  XXXXXXXXXX

3) XXXXXXXXXX Land 6) XXXXXXXXXX Land

1/3	XXXXXXXXXX	1/2  XXXXXXXXXX
1/3	XXXXXXXXXX	1/4  XXXXXXXXXX
1/3	XXXXXXXXXX	1/4  XXXXXXXXXX

Reference to the statute provisions of section, subsection and paragraph mentioned herein will in all cases, unless otherwise stated, relate to the Income Tax Act S.C. 1970-71-72, c.63 as amended, consolidated to June 10, 1993.

Our comments

We are in the process of developing a position which would deal with computing the profit resulting from real estate transactions where there are sales in a year which is not the situation in the case at hand. This position will deal with the appropriate method of matching costs against the revenue which they produce in accordance with generally accepted accounting principles and would be applicable to deal with XXXXXXXXXX situation in a year when he becomes a party to a sale. At this point in time, we hope, the treatment may not be different no matter whether he is a developer or simply if each transaction is treated as an adventure in the nature of trade.

Since the Friesen case is heading to the Supreme Court it is our preference to handle situations on an individual basis considering the circumstances of each particular case.

There is no provision in the Act that provides for a specific deduction or "write-off" as such to provide relief in respect of the decrease in the value of lands or other inventory items held for sale. In the absence of such a provision to specifically provide for such a deduction in computing income, paragraphs 18(1)(a) and/or (e) would apply to specifically deny such a deduction. Hence, if there is to be any recognition in respect of a decrease in the value of land, it would have to come about as a result of using a value lower than cost in arriving at the value of the closing inventory (assuming that it is appropriate to use the "retail method") in computing the cost of goods sold. It was clear from Friesen that there would not be any cost of goods sold in a particular year if in fact there was not a sale in that year.

In this particular situation it would be our position, based on Friesen, that there would not be any relief in respect of the decrease in the value of the land inventory, if for no other reason than because of the fact that there was not a sale in either of the years in question and, therefore, no cost of goods sold which would be the only mechanism to provide relief in respect of decreased inventory values, if in fact it was appropriate to use closing inventory in computing the cost of goods sold in a year when there is a sale.

R. Albert
for Director
Business and General Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch