25 April 1996 External T.I. 9606735 - INTEREST & PROPERTY TAXES ON VACANT LAND

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.

Principal Issues:

Whether vacant land used for earning rental income is subject to the restrictions in subsection 18(2).

Position:

Question of fact. Holding vacant land is generally subject to subsection 18(2) restrictions.

Reasons:

Rental income from vacant land does not satisfy the requirements of either of paragraphs 18(2)(c) or (d).

			       		960673
XXXXXXXXXX	        			A. Seidel
(613) 957-8974

Attention: XXXXXXXXXX

April 25, 1996

Dear Sirs:

This is in reply to your letter dated February 14, 1996, concerning the restriction in subsection 18(2) of the Income Tax Act (the "Act") on the deductibility of interest and property taxes in excess of rental revenue from land.

The situation described in your letter appears to relate to specific taxpayers and an actual fact situation. To the extent that you require assistance in determining the current tax status of the taxpayers involved, you should contact your local Taxation Services Office. To the extent that you require confirmation of the tax consequences of proposed transactions, we bring to your attention Information Circular 70-6R2 ("IC 70-6R2") dated September 28, 1990, and the Special Release thereto dated September 30, 1992, issued by Revenue Canada. Confirmation with respect to proposed transactions involving specific taxpayers should be the subject of a request for an advance income tax ruling. If you wish to obtain an advance income tax ruling for particular taxpayers with respect to specific contemplated transactions, a written request for an advance income tax ruling should be submitted in accordance with the Information Circular. However, we can provide you with the following general comments with respect to the application of subsection 18(2) of the Act which may be of some assistance.

In general terms, subsection 18(2) of the Act denies the deduction of interest and property taxes incurred in connection with the holding of vacant land unless the land is held primarily for the purpose of gaining or producing income from the land for the year or is to be used in the course of a business of the taxpayer in the year, other than the business of resale or development of such land. Whether vacant land used for rental purposes is held for the purpose of gaining or producing income or used in the course of a business is a question of fact that can only be determined after a review of all of the relevant details of the particular situation.

When a taxpayer holds land primarily for the purpose of gaining or producing rental income therefrom for a particular year, subsection 18(2) of the Act would not apply to deny the amount of interest or property taxes that may be claimed by the taxpayer, but the deduction thereof would, under subsection 18(2) of the Act, be restricted to the taxpayer's gross rental revenue from the land minus the total of all amounts deducted in computing the taxpayer's income from the land for the year.

These comments are provided in accordance with the guidelines set out in paragraph 21 of IC 70-6R2.

Yours truly,

for Director
Resources, Partnerships and
Trusts Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

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