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 subsection 18(2) would apply with respect to an adjacent parcel of land to be acquired by a motel, to prevent others from developing it to the detriment of the motel business, where the land is: (i) left vacant, or (ii) improved using it for additional parking, picnic area, etc.
Position:
(i) likely, and (ii) maybe not.
Reasons:
(i) vacant land is not generally considered to be "used" in the course of carrying on business, and (ii) improvements may qualify under paragraph (c) of meaning of "land" in subsection 18(3).
April 4, 1997
XXXXXXXXXX Tax Services Office Headquarters
Business Audit B.G. Dodd
(613) 957-8954
Att: XXXXXXXXXX
963881
XXXXXXXXXX
Subsections 18(2) and (3) of the Income Tax Act ("Act")
This is in reply to your round trip memorandum dated November 18, 1996 with which you enclosed a letter, dated October 21, 1996, from XXXXXXXXXX. We apologize for the delay.
The owners of the Motel are contemplating the purchase of a city-owned lot adjacent to the Motel property in an effort to prevent it from being acquired by others who might develop it in a manner which would be detrimental to the Motel business. The Motel owners intend to finance the purchase and are requesting a ruling that the interest charges and property taxes will be deductible for income tax purposes.
In your reply to XXXXXXXXXX, you might note that the Department does provide an advance income tax rulings service in respect of proposed transactions but that the procedures set out in Information Circular 70-6R3, dated December 30, 1996, are to be followed. Currently, the fee charged is $90 per hour (plus GST). You might further note (as discussed in paragraph 22 of the Circular) that the Department does not formally comment on specific proposed transactions otherwise than through the advance rulings service. Should they not wish to proceed on this basis, we would offer the following comments of a general nature but these are not binding on the Department with respect to any specific situation.
Subsection 18(2) of the Act specifically denies a deduction for interest on a debt relating to the acquisition of land, as well as property taxes in respect of the land, unless the land can reasonably be considered to have been, in the year,
(i)used in the course of a business (other than a land development business) carried on in the year by the taxpayer, or
(ii)held primarily for the purpose of gaining or producing income of the taxpayer from the land for the year.
There is nothing in the correspondence to suggest that (ii) above might be applicable, so the concern presumably would be whether the exception in (i) above might apply.
Whether land may reasonably be considered to have been used in the course of a business carried on in the year by the taxpayer is a question of fact that can only be determined based on a review of all of the relevant details of the particular situation. In making the determination, subsection 18(2) of the Act provides that regard is to be had to all of the circumstances, including the cost to the taxpayer of the land in relation to the taxpayer's gross revenue from the land. In the case of vacant land, it is our general view that it is not "used" in the course of carrying on a business. Accordingly, where a parcel of vacant land is acquired and left as is, it is our view that subsection 18(2) of the Act would normally apply to deny the deduction of the related interest expense and property taxes.
It is also our view that such a parcel of vacant land would not be excluded from the meaning of "land" by virtue of paragraph (c) thereof in subsection 18(3) of the Act. In this regard, such a parcel of vacant land would not be a "parking area, driveway, yard, garden or similar land as is necessary for the use of any property described in paragraph (a)", being a building or other structure affixed to land. Whether improvements to the vacant land would result in its qualifying under paragraph (c) of the definition of land would depend on the specific facts. Nevertheless, it would seem to us that it might be possible, depending on the particular facts.
We hope this will be of assistance to you in replying to the XXXXXXXXXX.
for Director
Resources, Partnerships and
Trusts Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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