9 May 1997 External T.I. 9702805 - TERMINAL LOSSES

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:

An individual may purchase land with a leased building on it. A short time following the purchase, the building may be torn down. The issue is whether a terminal loss can be claimed in respect of the demolished building.

Position:

Likely not

Reasons:

Reference was made to comments in paragraph 6 of IT-128R, paragraph 6 of IT-485 and paragraphs 4 to 8 of IT-220R3.

		970280
XXXXXXXXXX	M. Eisner

May 9, 1997

Dear Sir and Madam:

Re: Terminal Losses on Demolition of Old Building

This is in reply to your letter of January 27, 1997 concerning the above-noted subject.

You are concerned with the situation where an individual purchases real estate including a building, which will probably be torn down within a year. The building is very old but may be rented for awhile prior to demolition. Thereafter, the land would be prepared for construction of new buildings that will be rented. You are concerned about the tax treatment of the demolition of the old building. In particular, you asked about the possibility of claiming a terminal loss on the old building.

Where a taxpayer purchases real estate including a building and the building is torn down within a relatively short time after purchase, the question arises as to whether the building should be classed as depreciable property. Generally, it is our view that where the building is used to earn income for a short time prior to demolition, it is not regarded as depreciable property unless the taxpayer can clearly establish that the prime intention on acquiring the building was for the purpose of gaining or producing income. Thus, in the foregoing circumstances, it is likely that the individual may not be able to claim any terminal loss as a result of demolishing the building. With respect to these comments, reference can to paragraphs 4 to 8 of Interpretation Bulletin IT-220R2, paragraph 6 of Interpretation Bulletin IT-485 and paragraph 6 of Interpretation Bulletin IT-128R, each of which have been enclosed.

The above comments are general in nature and do not constitute a binding advance income tax ruling.

We trust that our comments will be of assistance to you.

Yours truly,

John F. Oulton
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch