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 two adjoining residential properties purchased by a corporation in July 1994, with the intention of demolishing both old houses and subdividing the two lots into three smaller lots for sale was a capital acquisition or a venture in the nature of trade. It was the intention that the shareholder would acquire one of the new lots for the purpose of building a residence for his occupancy.
Position:
Not capital property to the corporation as property was acquired for resale. The shareholder, would be obliged to pay his corporation fmv for a lot to be used by him to build a residence for his own occupancy. Whether the shareholder purchased an undivided interest in the property before it was subdivided and partitioned or whether he simply purchased the lot from the corporation after it was severed, would not alter the position that the shareholder acquired the lot as a capital property.
Reasons:
The corporation acquired the two properties with a view to subdividing into three residential building lots, constructing and selling houses on two lots and selling the third lot to the individual shareholder who intends to construct a residence. This is a trading transaction by the corporation.
March 4, 1997
GST Rulings & Interpretations Business & Publications
Financial Inst. & Real Property Div. Division
Vanier Towers, Tower C, 10th Floor A.M. Brake
25 McArthur Road (613) 957-2133
Attention: Tom Alley
963241
Land transaction, Capital v. Inventory
This is in reply to memoranda dated September 26, 1996 and October 17, 1996 wherein you requested our comments regarding the income tax treatment in a situation which we understand can be summarized as follows:
1.A corporation (100% owned by an individual) in the business of engineering consulting, developing real property, construction and related activities acquires (July 1994) two adjacent properties (66' X 165') with total frontage of 132 ft.(lots A & B). There was an older residential house located on each of lots A and B.
2.The corporation's original plan was to demolish the houses and subdivide the 132 ft. frontage into three 44' residential building lots. It intended to sell one of the lots to the individual shareholder (the "individual") and to sell the other two lots after building dwelling houses on them for resale, subject to acquiring proper zoning and permission to sever, etc.
3.Subsequent to getting the proper zoning and severing approval, it demolished the house on lot A, severed 44 ft. and constructed a dwelling which was sold in August 1995. The remaining 22 ft. adjacent to lot B now forms part of an 88 ft. lot which cannot be subdivided until the dwelling on the original lot B is demolished.
4.Before demolishing the remaining building, the corporation and the individual are contemplating having the corporation sell a 50% undivided interest in the remaining property (the 88 ft. lot with the original lot B dwelling) to the individual, demolishing the dwelling, subdividing into two 44 ft. lots and partitioning with the individual owning one (upon which he intends to build a personal residence) and the corporation being the sole owner of the other, which it will sell after constructing a house thereon.
From an income tax perspective, in our view, the acquiring of the properties did not constitute a capital transaction by the corporation. It was always the corporation's intention to end up with two 44 ft. building lots upon which it intended to construct dwelling houses for resale with the remaining lot to be sold to the individual for purposes of constructing a personal residence. Whether the individual acquires the 44 ft. lot as described under paragraph 2 or 4 above, does not change the activity of the corporation from being other than on account of inventory and revenue.
It is also our view that the individual will have acquired a capital property, regardless of whether the acquisition takes place as described under paragraph 2 or 4 above. This position is based on the premise that the individual's only intention was to acquire a residential lot upon which to construct a residence for his occupancy. While the stated intention of the individual would, on the surface, be accepted at this time, subsequent events could cause his position to be reviewed if, for example, he commenced to build a dwelling for resale. Such a determination could only be made when all the circumstances leading up to the eventual disposition are known.
The cost to the individual of acquiring one of the three lots already severed by the corporation would be the fair market value of the severed lot at the time it was acquired. The cost of acquiring a 50% undivided interest in the 88 ft. lot and ending up with a 100% interest in one of the two 44 ft. lots, after subdividing and partitioning, would also be at fair market value. It would seem that, since approval for rezoning and subdividing had already been received by the corporation, the value of the 50% undivided interest in the 88 ft. lot and the value of a 44 ft. severed lot would not be dissimilar, except for the actual severing costs to be allocated to each lot.
With respect to your comments under the heading of 'Interpretations of Supplies Made', it should be noted that for income tax purposes, subsection 248(21) provides that in certain circumstances, where a property is the subject of a partition, the new interest of each such person is deemed to be a continuation of that person's undivided interest in the property immediately before the partition.
R. Albert
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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