20 May 1997 External T.I. 9710855 - EXCHANGE OF PROPERTY, FORMER BUSINESS PTY

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 we can rule that section 44 applies on exchange of property

Position:no

Reasons:

1. there is some evidence that the property may not be a capital property
2. the property does not appear to have been used by the taxpayer to earn business income

	                      		971085
XXXXXXXXXX	                         Denise Dalphy
(613) 957-9231
Attention:  XXXXXXXXXX

May 20, 1997

Dear Sirs:

Re: Exchange of Properties
XXXXXXXXXX
Request for Advance Income Tax Ruling

This is in reply to your letter of April 16, 1997 wherein you requested that we reconsider our November 1, 1995 opinion (file #952103) that we are unable to provide an advance income tax ruling (a "ruling") on the exchange of properties referred to above. We regret to advise you that we are still unable to provide a ruling.

You are correct to point out that paragraph 14(e) of Information Circular 70-6R2 (now paragraph 15(e) of Information Circular 70-6R3, dated December 30, 1996) is permissive, not restrictive. In fact, in cases where the evidence clearly supports a determination that the proposed transaction is on capital account and there is no evidence whatsoever that the proposed transaction is on income account, the Department may, and has, ruled on section 44 of the Income Tax Act (the "Act"). However, in cases where some evidence exists which may cast doubt as to whether the proposed transaction is on capital account, we decline to rule - and we do not as part of the rulings process perform an audit or quasi-audit as to whether a property is held on income account or on capital account. As we explained in our November 1, 1995 letter, this is such a case and we are therefore unable to rule.

In particular, in the case of the properties to be exchanged by XXXXXXXXXX, the issue of whether they hold the property on capital account is not free from doubt; the documentation that you provided to us demonstrates that XXXXXXXXXX had a possible intention to subdivide the property. In this respect we would refer you to paragraph 5 of Interpretation Bulletin IT-218R, which provides:

" 5. A taxpayer's intention at the time of purchase of real estate is relevant in determining whether a gain on its sale will be treated as business income or as a capital gain. It is possible for a taxpayer to have an alternate or secondary intention, at the time of acquiring the real estate, of reselling it at a profit if the main or primary intention is thwarted. If this secondary intention is carried out any gain realized on the sale usually will be taxed as business income."

Although we do not have sufficient information to definitively conclude that the proposed transaction would be on income account - and only an audit would establish this - we do have sufficient doubt as to whether the transaction would be on capital account that we are unable to provide a ruling on subsection 44(1) of the Act, since a property must be a capital property for that subsection to apply.

We also wish to inform you that even if we had not had evidence which caused some doubt as to whether the proposed transaction would be on capital account, it would appear that we would not have been able to provide a favourable ruling on section 44 of the Act. Paragraph 44(1)(b) of the Act applies where property that "was, immediately before the disposition, a former business property of the taxpayer", and "former business property" is defined in subsection 248(1) of the Act as: "a capital property of the taxpayer that was used (emphasis added) by the taxpayer or a person related to the taxpayer primarily for the purpose of gaining or producing income from a business...". In this case, we cannot conclude that the property to be exchanged by XXXXXXXXXX is a "former business property" for it appears that the property was not XXXXXXXXXX and that they did not use the property primarily for the purpose of gaining or producing income from a business. In our view, land that has never been used by a taxpayer to earn income cannot qualify as a "former business property." In this regard, we would refer you to paragraph 2 of Interpretation Bulletin IT-491 and paragraph 15(a) of Interpretation Bulletin IT-259R2.

We trust this further explains our decision that we cannot rule as requested.

Yours truly,

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