Principal Issues: [TaxInterpretations translation] Two scenarios were presented to us. The taxpayer wished to know why the treatment of property and education taxes differs according to the scenario.
Position: Question of fact. General comments provided.
Reasons: Income Tax Act.
XXXXXXXXXX 2009-033303
November 5, 2009
Dear Sir,
Subject: Municipal and school taxes on land lots
This is further to your letter that we received on May 11, 2009 in which you submitted the following two scenarios:
Scenario A
- Ms. A bought land in 2003 for $36,000 in order to construct a rental building;
- Pending construction, Ms. A rented the land for $7,000 per year;
- For the years in which Ms. A rented the land, she deducted, among other things, the amount of property and school taxes paid;
- Each year, Ms. A earned income from renting the land.
For the purposes of our analysis, we have assumed that, for the years 2003 to 2006, Ms. A held the land primarily for the purpose of earning income.
Scenario B
- Mr. B also bought land in 2003 for $36,000 to build a rental building;
- Mr. B sold the land in 2006 for $48,000 and declared a capital gain of $12,000;
- During the years that Mr. B held the land, he did not deduct the amount of property and school taxes paid.
For the purposes of our analysis, we have assumed that Mr. B held the land primarily for resale or development purposes.
Your Question
In light of the two scenarios above, you wish to know why municipal and school taxes are treated differently.
Unless otherwise indicated, all statutory references herein are to the provisions of the Income Tax Act (the "ITA").
Our Comments
As stated in paragraph 22 of Information Circular 70-6R5 of May 17, 2002, it is the practice of the Canada Revenue Agency not to issue written opinions on proposed transactions otherwise than by way of advance income tax rulings. Furthermore, when it comes to determining whether a completed transaction has received adequate tax treatment, the determination is made first by our Tax Services Offices as a result of their review of all facts and documents, which is usually performed as part of an audit engagement. However, we can offer the following general comments that we hope may be helpful to you. These comments may, however, in certain circumstances, not apply to your particular situation.
The tax treatment of an expense depends on the reason for which it is incurred. Generally, a taxpayer can only deduct, in computing income, expenses incurred for the purpose of earning business or property income. However, subsection 18(2) prohibits deductions for property and school taxes except in very limited circumstances.
In the first situation that you provided, it appears that Ms. A held the land principally to enable her to earn income from it for the years 2003 to 2006. Thus, we are of the view that subsection 18(2) will not impose any restrictions on the deductibility of property and school taxes.
As for Mr. B, since he held the land primarily for the purpose of resale or development, subsection 18(2) will limit the amount deductible on account of property and school taxes to income that is derived from the land.
We hope that the above comments are of assistance.
Best regards,
François Bordeleau, Advocate
Manager
Business and Partnerships Section
Income Tax Rulings Directorate.