11 April 2011 External T.I. 2011-0397351E5 - Sale of Shares on Account of Income or Capital

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 a disposition of shares where the underlying asset is vacant land is on account of income or capital.

Position: It is a question of fact which depends on the circumstances.

Reasons: It is possible for a taxpayer to have an alternate or secondary intention, at the time of acquiring vacant land, 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 of the shares will usually be taxed as business income.

XXXXXXXXXX
				2011-039735
				Kathryn McCarthy, CA
				(613) 828-9377

April 11, 2011

Dear XXXXXXXXXX :

Re: Sale of Shares on Account of Income or Capital

This is in response to your e-mail of February 25, 2011, and our telephone conversations on February 17 and 18, 2011 (McCarthy/ XXXXXXXXXX ), concerning the above-noted subject.

You described two clients ("Mr. A" and "Mr. B") which have been partners in various projects over the last 25 years concentrating mainly in the real estate management and financing fields. They each own 50% of the shares of "C Co".

C Co holds two parcels of vacant land ("Land D" and "Land E"). Land D development plans included a 100 room hotel/lodge, an 18 hole golf course, hundreds of single family and duplex homes, 1,000 condominiums and tens of thousands of square meters of commercial retail space. After years of negotiations and public hearings, development approval was received from the municipal authority. Land E development plans included less than 100 condominiums. After receiving approval from the municipal authority, your clients never proceeded with the development of Land E.

No improvement was ever done on either piece of land. Millions of dollars in expenses related to the land have been capitalized (e.g. land, property taxes, legal fees, architect and designer fees, marketing and financing charges). No income or sale has been made since the purchase of the land. Consequently, you have enquired whether the sale of the shares in C Co. is on account of income or capital under the Income Tax Act ("Act").

Our Comments

The situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular IC 70-6R5, Advanced Income Tax Rulings, dated May 17, 2002. This IC and other Canada Revenue Agency ("CRA") publications can be accessed on the Internet at www.cra-arc.gc.ca. Should the situation involve a specific taxpayer and a transaction that has already been completed, you may wish to submit all relevant facts and documentation to the appropriate Tax Services Office ("TSO") for their views. A list of TSOs is available on the "Contact Us" page of the CRA website. However, we are prepared to provide the following general comments, which may be of assistance.

Generally, a gain arising on the sale of real estate will be considered to be either business income or a capital gain. There is no provision in the Act which describes the circumstances in which gains from the sale of real estate are to be determined as being either income or capital. However, in making such determinations, the courts have considered factors such as those described in 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.

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.

The more closely a taxpayer's business or occupation is related to real estate transactions, the more likely it is that any gain realized by the taxpayer from such a transaction will be considered to be business income rather than a capital gain.

Whether a particular disposition of shares is on account of income or capital is a question of fact. Factors considered in making such determination are discussed in Interpretation Bulletin IT-479R, Transactions in Securities. When the disposition of shares in a corporation by a taxpayer is merely an alternative method of realizing the gain inherent in real property owned by the corporation where such gain would be on income account if the real property had been sold, this is a major factor in determining whether or not the gain from the disposition of those shares will be treated on income account.

We trust the foregoing comments are of assistance.

Yours truly,

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