29 October 1999 External T.I. 9927905 - INCOME OR CAPITAL LOSS

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.

XXXXXXXXXX 1999-000570

October 29, 1999

Dear XXXXXXXXXX:

Re: Your request for an Advance Income Tax Ruling

We are writing in response to your letter of September 30, 1999, in which you sought confirmation about the nature of a loss that you wish to report in your 1999 income tax return.

In your letter, you outlined the circumstances relating to the 1989 purchase of land on XXXXXXXXXX, which was acquired for the sole purpose of opening a restaurant and banquet facility. Since you bought the property, you have been unable to proceed with your plans because the municipal zoning was changed. This has resulted in a substantial reduction in the value of the land. From your perspective, it is unlikely that you will ever be able to build a commercial property on the land. We note that you have hired professional assistance in an effort to address the zoning problems. Since you are now satisfied that you will be unable to proceed, you would like to discuss the possibility of recognizing the loss as an income loss in your 1999 income tax return. You state that there has been no disposition of the property.

Our comments

We are unable to issue an advance income tax ruling, since there is no proposed transaction seriously contemplated at this time. The definition of a ruling is set out in paragraph 2 of the enclosed information circular 70-6R3, Advance Income Tax Rulings. However, we offer the following general comments which may be of assistance in determining the Department's position on the issues you raised in your letter.

There is no provision in the Income Tax Act that would allow you to claim as an income or a capital loss, the decline in value of the land since you purchased it in 1989. In order for you to recognize any loss for income tax purposes, there would have to be a disposition of the property. So, in practical terms, you will be unable to recognize

any loss in your return because you still own the land. Similarly, if the value of the property had increased substantially, there is no requirement in the Act to recognize the gain until you actually dispose of it or are deemed to have disposed of it, pursuant to specific rules in the law.

We also would like to comment on your view that any gain or loss should be recognized as an ordinary income gain or loss. If you had disposed of the property, we would have difficulty accepting this position, since the land was acquired for the specific intention of erecting a building on it for your restaurant and catering business. In general terms, the courts would look to your "intention" and possibly the "secondary intention" for acquiring the land. Since it was not acquired with the intention of selling it for gain and you are not in the business of buying and selling property, it is our view that any gain or loss on disposition would be capital in nature. For a discussion of the rules on calculating capital gains and losses in the Act, we suggest that you review the Department's Capital Gains guide that is available from Client Assistance officers in the Ottawa Tax Services Office.

We trust that our comments are of assistance.

Yours sincerely,

John Oulton
For Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

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