12 May 1997 External T.I. 9705135 - CHANGE IN USE OF CAPITAL PROPERTY TO INVENTORY

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:

Does a requested rezoning change result in a change in use and can the proerty be transferred under section 85 deferring the can on the ultimate sale to the sisterco.

Position:

A question of fact however a zoning change is not a disposition and results in a notational disposition on the date of conversion. A section 85 rollover is a disposition to which the notational increase is relevant.

Reasons:

section 54, subsection 13(21) and IT 218R par 15

                                                      970513
XXXXXXXXXX                                      C. Tremblay

Attention: XXXXXXXXXX

May 12, 1997

Dear Sirs:

Re: Change in use of capital property to inventory

This is in reply to your letter of February 13, 1997, wherein you request our views as to when a change in use of capital property to inventory occurs in the hypothetical fact situation given.

Although you state the situation described is hypothetical, it appears to involve either proposed and/or completed transactions. If your enquiry involves completed transactions involving specific taxpayers, your questions should be directed to your Taxation Services Office which has the responsibility of determining the tax consequences of completed transactions and their implications to the specific taxpayers. If your enquiry involves a proposed transaction, please refer to Information Circular 70-6R3 for the procedure to be followed. Although we are unable to provide any opinion in respect of the specific transactions described in your letter, we have set out some general comments which may be of some assistance.

A determination of when a conversion of real property from capital property to inventory takes place can only be made following a review of all the relevant facts of a given situation. However, the Department's has stated in paragraph 15 of Interpretation bulletin IT 218R that where real estate that is used for the purpose of gaining or producing income from a business or property is converted from capital property to inventory, the action of conversion does not constitute a disposition within the meaning of section 54 and subsection 13(21). It is however recognized that the ultimate sale of real estate that was so converted may give rise to a gain or loss on capital account, a gain or loss on income account or a gain or loss that is partly capital or partly income. Accordingly, where such real estate has been converted to inventory, capital gains and losses, if any, will be calculated on the basis that a notional disposition of such property occurred on the date of conversion. Generally, with respect to real estate, our position is that the conversion of property occurs at the time of making application to the relevant authority for approval of a plan to subdivide. Moreover, a section 85 election constitutes a disposition, thus, in our view, real estate that has been rezoned from industrial to residential and transferred pursuant to section 85 of the Act would be considered an inventory item to which the notional disposition calculated amount is relevant.

We trust our comments will be of assistance to you.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch