25 June 1999 External T.I. 9911065 - MEANING OF FORMER BUSINESS PROPERTY

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: Whether an apartment building can be considered a "former business property" in the situation where the taxpayer worked full-time at renovating and restoring it.

Position: No.

Reasons: In general terms, a former business property is defined as a capital property of the taxpayer that is real property (other than a “rental property”) used by the taxpayer or a related person primarily for the purpose of gaining or producing income from a business. Rental property is defined for this purpose as real property owned by the taxpayer and used in the particular year principally for the purpose of gaining or producing gross revenue that is rent. Accordingly, even though a property is used to earn business income, it would be disqualified as a former business property if it was used in the taxation year in which it was disposed of principally for the purpose of producing rent.

XXXXXXXXXX  	J. Gibbons
		5-991106
June 25, 1999

Dear XXXXXXXXXX:

We are replying to your facsimile of April 22, 1999, in which you requested our view whether a particular property would qualify as a “former business property” so that the “roll over would be tax free.”

Presumably, when you state that the “roll over would be tax free,” you are referring to the replacement property rules in section 44 of the Income Tax Act. In general terms, these rules allow a taxpayer to defer the recognition of a capital gain on the disposition of a former business property if the taxpayer acquires a replacement property.

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 ruling request submitted in the manner set out in Information Circular 70-6R3. Also, our tax services offices normally consider requests for written opinions on completed transactions. However, we offer the following general comments.

Briefly, the facts, as we understand them, are as follows:

1. In XXXXXXXXXX, you purchased a building, which was built in XXXXXXXXXX and was in a poor state of repair.

2. For the next four years, and on a full-time basis, you proceeded to renovate the entire building.

3. At the time of purchase the gross annual rents were $XXXXXXXXXX.

4. Since the renovations have been completed, the gross annual rents have been $XXXXXXXXXX.

The term “former business property” is defined in subsection 248(1) of the Act. In general terms, a former business property is a capital property of the taxpayer that is real property (other than a “rental property”) used by the taxpayer or a related person primarily for the purpose of gaining or producing income from a business. Rental property is defined for this purpose as real property owned by the taxpayer and used in the particular year principally for the purpose of gaining or producing gross revenue that is rent. Accordingly, even though a property is used to earn business income, it would be disqualified as a former business property if it was used in the taxation year in which it was disposed of principally for the purpose of producing rent. Thus, your apartment building would not qualify as a former business property. This is so, even if your activities with respect to the apartment building were to be considered the carrying on of a business.

You should also be aware that, should you realize a gain on the disposition of your apartment building, your gain may be considered business income. The word "business" is defined in subsection 248(1) and includes, inter alia, an adventure or concern in the nature of trade. This definition can cause an isolated transaction involving real estate to be considered a business transaction. As a business, any gain or loss which arises therefrom is, by virtue of section 9, required to be included in computing income or loss, as the case may be. 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 either income or capital. However, in making such determinations, the courts have considered factors such as the taxpayer's intention with respect to the real estate at the time of its purchase, the nature of the business, profession, calling or trade of the taxpayer, etc.

We trust that these comments will be of assistance.

Yours truly,

J.F. Oulton, CA
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate

Enclosure