Principal Issues: [TaxInterpretations translation] Does paragraph 53(1)(h) of the Income Tax Act (the "Act") apply to increase the adjusted cost base of an unoccupied property by the amount of expenses incurred between the death of the owner and the sale to a third party for maintenance, property taxes and insurance?
Position: No.
Reasons: Subsection 18(2) does not apply because the property, which is not land, has not been a source of income from a business or property. Therefore, paragraph 53(1)(h) does not apply to increase the adjusted cost base of the property by the property taxes paid. Other expenses are not incurred for the purpose of disposing of the property and are personal in nature.
May 3, 2010Shawinigan Tax Services Office Income Tax Rulings Directorate Audit Office Business and Partnerships Division Attention: Martine Bérubé Lucie Allaire, Advocate, CGA. D. Fisc. 2010-035963
Expenses incurred in respect of an unoccupied property
This memo is in response to your email dated March 8, 2010 in which you asked for our comments regarding the capitalization of property taxes, insurance and maintenance expenses for an unoccupied property, following email exchanges (Bérubé/Allaire).
Unless otherwise indicated, all legislative references herein are to the provisions of the Income Tax Act (the "Act").
Following the death of their mother, two adult sisters inherited a property, for which expenses for property taxes, maintenance and insurance were incurred between the date of death, i.e. XXXXXXXXXX, and the sale to a third party on XXXXXXXXXX. This property had been owned by the mother since XXXXXXXXXX.
You wish to know if property taxes, maintenance and insurance expenses may increase the capital loss realized when the property is sold to a third party. In particular, you are asking whether the expenses can be added to the adjusted cost base of the property pursuant to paragraph 53(1)(h).
Our Comments
In general, paragraph 53(1)(h) provides for an increase in the adjusted cost base of land in cases where the deduction for property taxes has been denied because of subsection 18(2). In this regard, subsection 18(2) provides, among other things, that interest on debt relating to the acquisition of land, or property taxes, are deductible to the extent that the gross revenue from the land exceeds other expenses incurred, unless the land can reasonably be considered to be in the year:
- used in the course of a business; or
- held primarily for the purpose of earning income from the land for the year.
For the purposes of subsection 18(2), paragraph 18(3)(a) defines land as land that has no building or other structure affixed to the land, that is not subjacent to such a building or structure, and that is not land that is contiguous to or incidental to such a building or structure. Thus, in the Particular Situation, the property would not constitute land under subsection 18(2) and paragraph 53(1)(h).
Where property taxes are not deductible in computing a taxpayer's income from land by virtue of either paragraph 18(1)(a) or paragraph 18(1)(h), the amount of such property taxes cannot be included by virtue of paragraph 53(1)(h) in computing the adjusted cost base of the land.
On the other hand, the cost of a property may include legal fees, commissions, brokerage fees, and any other expenses that were incurred directly in connection with the acquisition of the property or that were incurred for the purpose of disposing of the property.
In light of the foregoing, we are of the view that expenditures for property taxes, insurance and maintenance cannot increase the capital loss realized on the disposition of the property on XXXXXXXXXXXX.
Access to Information
For your information, unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada 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, the electronic library version can be provided. Alternatively, the client 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 Ms. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.
We hope that these comments are of assistance.
François Bordeleau, Advocate
Manager
Business and Partnerships Section
Income Tax Rulings Directorate.