30 May 2003 External T.I. 2003-0017405 - 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.

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 gains resulting from the disposition of residences would be taxable on account of income or capital?

Position: Question of fact, general comments provided.

Reasons: General comments provided.

		2003-001740
XXXXXXXXXX 	Karen Power, CA
(613) 957-8953
May 30, 2003

Dear XXXXXXXXXX:

Re: Gains - Sale of Residences

We are writing in reply to your letter of April 28, 2003, wherein you requested our comments on whether gains resulting from the disposition of residences would be taxable on account of income or capital.

You are considering starting a new business that would consist of buying older undervalued homes, refurbishing them, and then selling them at a profit. You have indicated that these residences would not qualify as your principal residence as that term is defined in section 54 of the Income Tax Act (the "Act").

Our comments

Since your situation relates to actual proposed transactions, we refer you to our policy set out in Information Circular 70-6R5. This circular explains, among other things, that it is our policy not to provide written confirmation of the tax implications inherent in particular transactions unless an advance ruling request is submitted in the manner set out in that circular. Further, it should be noted that, as indicated in paragraph 15(e) of the circular, we may be unable to consider a ruling request when the major issue is whether a transaction should be viewed as being on account of income or capital. There are, however, publications produced by the Canada Customs and Revenue Agency ("CCRA") that provide some guidance on what should be considered in establishing whether a particular gain is on account of capital or income.

We suggest that you review 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 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 purchasing the property is usually significant. A taxpayer has to establish, on a balance of probabilities, that when the property was purchased, he or she did not have either a primary or secondary intention of selling it at a profit. In our view, if an individual involved in the home renovation business acquired residences with the intention of renovating them and later selling them (as described in your letter), the related gain (or loss) would be on account of income (i.e., business income). In the event that a gain on the sale of a residence is considered as being on account of income 100% of the gain would be taxable.

You have also enquired whether all business expenses are deductible in computing business income. Subsection 9(1) of the Act provides that a taxpayer's income from a business or property is the profit from that business or property subject to the rules in Part I of the Act. Section 18 of the Act contains several limitations concerning the deductions permitted. The purpose of paragraph 18(1)(a) of the Act is to deny a deduction for all outlays and expenses except to the extent that the outlays or expenses are made for the purpose of gaining or producing income from the business or property. The deduction for specific outlays and expenses is discussed in various other provisions of the Act. Section 67 limits an otherwise deductible amount to an amount that is reasonable in the circumstances. We are unable to comment on the deductibility of all expenses that might be incurred in running your business, you may however which to consult, among others, the following publications which may be useful:

? T4002 Guide - Business and Professional Income;
? IT-521R - Motor Vehicle Expenses Claimed by Self-Employed Individuals;
? IT-99R5 (Consolidated) - Legal and Accounting Fees;
? IT-121R3 - Election to Capitalize Cost of Borrowed Money;
? IT-153R3 - Land developers - Subdivision and development costs and carrying charges on land;
? IT-364 - Commencement of Business Operations; and
? IT-487 - General Limitation on Deduction of Outlays or Expenses.

Please note that your enquiry is in the nature of tax consultation; however, it is not the CCRA's role to engage in tax planning. Furthermore, there may be many other CCRA publications of relevance to your particular situation. Accordingly, you may wish to seek professional tax advice with respect to the tax planning aspects of your proposed business. Copies of information circulars, interpretation bulletins and guides referred to herein are available from your local tax services office or on the Internet at the following site - http://www.ccra-adrc.gc.ca/formspubs/menu-e.html.

We trust our comments will be of assistance to you.

Yours truly,

Milled Azzi, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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