30 December 2010 External T.I. 2010-0389031E5 - Income or Capital account

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 loss from the disposition of a dwelling would be on account of income or capital.

Position: General comments provided.

Reasons: Question of fact.

XXXXXXXXXX
					2010-038903
					Charles Rafuse
					613-247-9237
December 30, 2010

Dear XXXXXXXXXX :

Re: Income or Capital in Nature

This is in response to your letter of October 1, 2010 and our recent telephone conversation (XXXXXXXXXX /Rafuse), concerning your request for our comments on whether a loss resulting from the disposition of a dwelling would be treated on account of income or capital.

You have indicated that a taxpayer owned a rental property and started the construction of another dwelling in 2007 in the same area. This dwelling was completed in 2009 and then sold for less than the construction costs. The taxpayer is not a registered builder and did not occupy the dwelling. His original intent was to sell the dwelling for a profit; however, when he applied for the building permit, the taxpayer indicated it was being constructed to be a recreational property.

You have asked for a ruling or written opinion on whether the loss on the sale of the dwelling is a business loss or capital loss.

Our 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 an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office (the "TSO"). Further, it should be noted that, as indicated in paragraph 15(e) of IC 70-6R5, a ruling request cannot be entertained when the major issue is whether a transaction should be viewed as being on account of income or capital. We are, however, prepared to make the general comments set out below, which may be of assistance.

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 is a question of fact to be resolved based on a review of the documents and circumstances of the situation.

There are publications produced by the Canada Revenue Agency ("CRA") that provide guidance on factors that should be considered in establishing whether a particular gain is on account of capital or income. In this regard, you may wish to consult 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," and Interpretation Bulletin IT-459, "Adventure or Concern in the Nature of Trade".

As mentioned in paragraph 3 of IT-218R, there is no provision in the Income Tax Act which describes the circumstances in which gains from the sale of real estate are to be determined as being on account of income or capital. However, in making such determinations, the courts have considered different factors such as those explained in IT-218R. The issue generally involves a determination of the facts of each case. No one factor is conclusive; however, the taxpayer's motivation in obtaining the property is usually significant. We would mention that the criteria explained in IT-218R are similarly applicable in determining whether a real estate loss is on account of income or capital.

The above mentioned publications are available on the CRA website at www.cra-arc.gc.ca.

We trust that these comments will be of assistance.

Yours sincerely,

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