4 June 1997 External T.I. 9626305 - DEEMED DISPOSITION ON DEATH

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.

Principal Issues:

Income tax consequences of a change in one income earning use to another on a portion of land where subsection 45(1) of the Act does not apply and the taxpayer dies before the land inventory is sold. Land transfers automatically to taxpayer's spouse as the land is jointly held.

Position:

Question of fact when a change in use occurs. Land inventory is deemed to be disposed of pursuant to paragraph 70(5.2)(d) of the Act for proceeds equal to its cost amount - no election to dispose of for FMV is possible and capital gain/loss is computed on the notional disposition as indicated in IT-218R. Yes a portion of vacant real estate can qualify as land inventory and there is a deemed disposition on death.

Reasons:

Departmental policy as clearly outlined in IT-218R.

                                            962630
XXXXXXXXXX		                                Michael Cooke

June 4, 1997

Dear XXXXXXXXXX:

Re: Deemed Disposition of Property on Death

This is in reply to your letter of July 26, 1996, wherein you requested our views on the application of subsection 45(1) and paragraph 70(5.2)(d) of the Income Tax Act (the "Act"). We apologize for the lengthy delay in our response.

In your letter you outlined a situation where approximately ten acres of land were jointly owned by a taxpayer and the taxpayer's spouse under one title that was used by both of them to produce rental income. You indicate that such land was initially considered to be a capital property of both taxpayers; however, the taxpayers then undertook to subdivide and develop a two acre portion of the land for resale and commenced certain improvements. As a result, you advise that the income producing use of that two acre portion of the land was changed to another income producing use at that time and that any gain on a subsequent sale of that portion of the land would be on income account, rather than capital account, since that portion of the land would be considered to be inventory of the taxpayers. However, before the land inventory was sold you advise that one of the taxpayers died and the surviving spouse automatically became the sole owner of the entire ten acres of land by operation of law.

You ask what the income tax consequences would be under the Act based on the Department's stated position on "notional dispositions" of real estate where subsection 45(1) of the Act does not apply, as set out in paragraph 15 of Interpretation Bulletin IT-218R. You also wanted to know the policy reason why an election, similar to that found in subsection 70(6.2) of the Act, is not available to permit the deemed proceeds of disposition ("POD") of any land inventory owned by the deceased and the deemed cost of such land inventory acquired by the deceased's spouse, to be based on the land inventory's fair market value at the time of death, rather than its cost amount, where such property is transferred to a taxpayer's spouse as a consequence of the taxpayer's death.

The situation described in your letter appears to relate to an actual fact situation involving specific taxpayers and we are unable to consider such situations in a general letter of opinion. Should you wish the views of the Department with respect this particular situation, you should contact the appropriate local Tax Services Office and provide them with the full particulars of the situation, which would include identification of the taxpayers involved. Although we are not able to comment specifically on the situation you have provided, we can offer the following general comments that we caution may not apply to your particular fact situation.

Where a property is used for the purpose of gaining or producing income from a business or property and such property, or a portion thereof, is converted into another income producing use, such as may be the case where a rental property held on capital account is converted into inventory (or vice versa), it is the Department's view that the action of the conversion does not, by itself, constitute a disposition within the meaning of subsection 45(1) of the Act or the definition of that term in section 54 of the Act. The questions as to whether a particular property is held on income or capital account or not, and the timing of any change in the income producing use of a property are ones of fact which must be determined on a case by case basis.

However, where the income producing use of real estate has changed from rental to inventory and subsection 45(1) of the Act does not apply, paragraph 15 of IT-218R indicates that the capital gain or loss, if any, is calculated on the basis that a "notional disposition" took place on the date of the change in use but such gain or loss, if any, will only be taxable or allowable, as the case may be, in the taxation year during which the actual sale of the property occurs.

It is the Department's view, that for the purposes of the recognition of any unrecognized gain or loss that exists as a result of a "notional disposition" as described in IT-218R, the reference to an actual sale in paragraph 15 of IT-218R will also include any subsequent disposition or deemed disposition under the Act, whether any POD are actually received by the taxpayer or not. Therefore, for example, if a taxpayer died owning land inventory for which a previously unrealized capital gain or loss existed in respect of a notional disposition, as described above, the deemed disposition under either paragraph 70(5.2)(c) or (d) of the Act, will trigger the recognition of that gain or loss, as the case may be, at that time.

We are not aware of the policy reason why an election, similar to that found in subsection 70(6.2) of the Act, is not available to permit the deemed POD of any land inventory owned by the deceased and the deemed cost of such land inventory acquired by the deceased's spouse, to be based on the land inventory's fair market value at the time of death, rather than its cost amount, where such property is transferred to a taxpayer's spouse as a consequence of the taxpayer's death. Matters involving tax policy and implementation of tax legislation remain the responsibility of the Department of Finance ("Finance"). Should you wish to pursue this matter further we would suggest that you write to Finance at the following address:

Tax Policy & Legislation Branch
Department of Finance
140 O'Connor Street
L'Esplanade Laurier
17th Floor, East Tower
Ottawa, Ontario
K1A 0G5

While we trust the foregoing comments are useful, please note that they are given in accordance with the practice referred to in paragraph 22 of Information Circular 70-6R3 dated December 30, 1996, and are not binding upon the Department.

Yours truly,

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