30 July 2003 Internal T.I. 2003-0024037 - ACB OF LAND & BUILDING

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: Whether an outlay or expenses incurred in respect of land and building is an addition to the ACB of the properties.

Position: Question of fact.

Reasons: Definition of ACB in section 54.

		July 30, 2003

	Excise and GST/ HST Rulings Directorate	Income Tax Rulings Directorate
		Randy Hewlett, B.Comm
	Attention: Mr. Hugh Dorwood	613-957-8973

		2003-002403

The Adjusted Cost Base ("ACB") Of Land And
Building Under The Income Tax Act (the "ITA")

We are writing in response to your e-mail of June 13, 2003, wherein you asked for our opinion on the above noted issue, as it pertains to the eligibility of non-registered individuals to claim a Goods and Services Tax ("GST") rebate under section 257 of the Excise Tax Act (the "ETA") in respect of a taxable supply of real property.

Section 257 of the ETA allows a non-registered individual to claim a GST rebate on a taxable supply of real property. The rebate is determined by a formula known as "basic tax content", which takes into account improvements to and the capital cost of certain real property. For purposes of the ETA, an "improvement, in respect of property of a person, means any property or service supplied to, or goods imported by, the person for the purpose of improving the property, to the extent that the consideration paid or payable by the person for the property or service or the value of the goods is, or would be if the person were a taxpayer under the Income Tax Act, included in determining the cost or, in the case of property that is capital property of the person, the adjusted cost base to the person of the property for the purposes of that Act".

In this regard, you have inquired whether certain outlays and expenses incurred in respect of real property in three specific scenarios are considered part of the cost of the property or the ACB of a capital property for purposes of the ITA. We outline below, your description of each scenario and our comments.

Scenario 1

An individual acquires land and constructs a residential complex for the purpose of earning rental income. During the period of ownership, outlays and expenses are also incurred for the maintenance and/or improvement of the building. Eventually, the land and building are sold and the individual incurred outlays and expenses in respect of the sale.

The rules contained in sections 3 to 108, Division B, Part I of the ITA, apply in computing a taxpayer's income from various sources, including a business, property, and capital gains or losses on the disposition of certain property that is used to earn income from those sources. In accordance with paragraph 18(1)(b) of the ITA, "an outlay, loss or replacement of capital, a payment on account of capital or an allowance in respect of depreciation" is not deductible in computing income from a business or property. Generally, capital outlays and expenses incurred in respect of the acquisition of land or buildings will constitute part of the ACB of the particular property to which the amount relates, in accordance with the definition thereof in section 54 of the ITA.

Under this scenario, we are of the general view that the individual has acquired the land and constructed the building for the purpose of earning income from a source that is "property". Further, all outlays and expenses incurred in respect of the acquisition of the land and construction of the building are incurred on account of capital, and consequently, will constitute part of the ACB of the particular property to which the amount relates.

In terms of outlays and expenses that are related to the maintenance and/or improvement of the building, a determination will have to be made whether the amount is on account of capital and included in the ACB of the building, or deductible as a current expense. In general, outlays and expenses that provide an enduring benefit are considered on account of capital. Conversely, outlays and expenses that only serve to restore a property to its original condition are generally considered current. In this regard, more detailed information is provided in Interpretation Bulletin IT-128R, Capital Cost Allowance - Depreciable Property.

It should also be noted that outlays and expenses to the extent that they were made or incurred for the purpose of disposing of the land and building, would not constitute part of the particular property's ACB. To the extent that a particular amount relates to the disposition of the land, it will be deductible in calculating the capital gain or loss by virtue of paragraph 40(1)(a) of the ITA. To the extent that a particular amount relates to the disposition of the building, it will be deductible in calculating the undepreciated capital cost of the building pursuant to subsection 13(21) of the ITA, and if applicable, the capital gain by virtue of paragraph 40(1)(a) [A taxpayer cannot have a capital loss on the disposition of a depreciable property pursuant to subparagraph 39(1)(b)(i)].

Scenario 2

An individual acquires land for the purpose of constructing a residential complex for resale. The individual may stratify the property when construction is complete so that units can be sold individually. The individual also incurred outlays and expenses in respect of the sale. The individual is not in the business of construction and carried out the activity on a one-time basis.

Under this scenario, we are of the view that the individual is engaged in a commercial business activity to generate profit and therefore, has commenced a "business", as that term is defined in subsection 248(1) of the ITA. As such, for purposes of calculating the individual's profit from the business under the ITA: (a) the proceeds from the sale of the land and building will be considered business income, (b) all outlays and expenses incurred in respect of the acquisition of the land and construction of the building will constitute part of the cost of "inventory", as that term is defined in subsection 248(1), and (c) amounts incurred in respect of the sale of the land and the building (i.e., the inventory) will generally be deductible as current outlays and expenses. You should note that for a property that is inventory, references in the ITA to ACB and the rules relating to its calculation are only relevant for the rules regarding capital gains and losses, and hence, are not applicable to transactions relating to the calculation of business income.

Scenario 3

An individual carrying on a business (e.g. a medical doctor) acquires land and constructs a building that is used to earn business income. During the period of ownership, outlays and expenses were also incurred for the maintenance and/or improvement of the building. Eventually, the land and building are sold and the individual also incurred outlays and expenses in respect of the sale. The individual is not in the business of construction.

Under this scenario, we are of the view that generally all of the outlays and expenses incurred in respect of the acquisition of the land and construction of the building will be considered incurred on account of capital, and consequently, will constitute part of the ACB of the particular properties. You should note, however, that subsection 20(1) of the ITA could allow the deduction of an otherwise capital amount in computing a taxpayer's income from a business. Examples include paragraph 20(1)(aa): amounts paid for landscaping of grounds, paragraph 20(1)(cc): amounts paid for expenses of representation, paragraph 20(1)(dd): amounts paid for site investigation, and paragraph 20(1)(ee): amounts paid for utility service connections. Where otherwise capital amounts have been deducted in computing income from a business, the amounts are not included in the ACB of a particular property.

In terms of outlays and expenses related to the maintenance and/or improvement of the building, as well as those incurred for the purpose of disposing of the land and building, our comments in Scenario 1 above apply.

We trust our comments are of assistance. For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Customs and Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the electronic library version, or they may request a severed copy using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.

John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch

- 4 -