14 July 2011 External T.I. 2011-0411931E5 - Income or Capital Gain

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.

Principal Issues: Whether in a particular situation a gain or loss from a sale of real property should be treated as being on account of income or capital.

Position: It is a question of fact, but probably in this case it is on account of income.

Reasons: IT-218R and jurisprudence.

XXXXXXXXXX 				2011-041193
					Linda Compton
					(613) 957-2135
July 14, 2011

Dear XXXXXXXXXX :

Re: Technical Interpretation Request - Income or Capital

This is in response to your fax dated June 22, 2011 inquiring whether in the situation described below a gain or loss from the sale of real property should be treated as being on account of income or capital.

You state that in 2008, the taxpayer purchased a ninety acre farm from his uncle with the intention of subdividing and developing the property into building lots ready for resale. The taxpayer gave the uncle a promissory note for the full-purchase price with a maturity date in May 2023. The taxpayer was to pay the promissory note with a percentage of the proceeds from each lot sold. The uncle continued to live on the land rent free and to farm until early 2011. In 2011, the uncle became unable to farm and at that time the taxpayer sold 17.5 acres to a land developer and an option to purchase 32 acres to the province of XXXXXXXXXX . The taxpayer is not experienced in land development.

Your question concerns the tax treatment (income or capital) of the gain from the sale of the land to the developer.

Comments

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of a request for an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, "Advanced Income Tax Rulings", dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the internet at http://www.cra-arc.gc.ca. Where the particular transactions are complete, the inquiry should be addressed to the relevant tax services office, a list of which is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following comments in respect of the issues that you raised. Please note, however, that these comments are of a general nature only and are not binding on the CRA.

As noted in paragraph 3 of Interpretation Bulletin IT-218R, Profit, Capital Gains and Losses from the Sale of Real Estate, Including Farmland and Inherited Land and Conversion of real Estate from Capital Property to Inventory and Vice Versa ("IT-218R"), there are no provisions in the Income Tax Act ("Act") which describe the circumstances under which in a particular case it can be determined that gains from the sale of real estate are on account of income or capital. The determination is made based on a review of the facts in the particular case. The courts in making such determinations, have considered different factors as set out in IT-218R. No one factor is conclusive; however, the taxpayer's motivation in obtaining the property is usually a significant factor. In this regard, paragraph 5 of IT-218R states:

"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 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."

In the situation you described, it would appear that the taxpayer purchased the property with the primary intention of subdividing and developing the property into building lots ready for resale. The taxpayer's means of financing the purchase of the property was from the proceeds realized on the sale of the lots. Although due to a lack of expertise, the taxpayer was unable to develop the lots, the taxpayer has sold the land piecemeal to a land developer. From the information provided, it would appear that the gain from the sale of the property is on account of income.

We trust our comments will be of assistance to you.

Yours truly,

Sandy Parnanzone
Manager
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch