Principal Issues: Can paragraph 13(21.1)(a) apply to a sale of a building and land if the vendor allocates the sale price only to the land because the purchaser demolishes the building shortly after the acquisition?
Position: yes
Reasons: In the situation contemplated above, subsection 13(21.1) can apply if the proceeds of disposition of the building determined, without reference to subsections 13(21.1) and (21.2) but taking into account section 68, are less than the lesser of the cost amount and the capital cost of the building immediately before the disposition.
November 8, 2006
Toronto Centre TSO HEADQUARTERS Large Business Audit S. Lewis Unit 453 2-4 (613) 941-7239 Attention: Sharon Brar 2006-020330
Application of subsection 13(2.1) of the Income Tax Act
This is in response to your memorandum of August 22, 2006, regarding the application of subsection 13(21.1) of the Income Tax Act (the "Act").
We have the following understanding of the facts:
- The taxpayer sold both the land and a building (the "Property") to a purchaser.
- The purchase agreement did not specify how proceeds were to be allocated between the land and the building.
- The purchaser demolished the building immediately after it purchased the Property.
- In its income tax return, the taxpayer allocated the total proceeds of disposition of the Property to the land.
- The building that was sold was not the last property in the class and the disposition did not create a terminal loss.
It is the taxpayer's opinion that the proceeds of disposition of the building are nil. In support of its position, the taxpayer refers to paragraph 7 of Interpretation Bulletin IT-220R2, which indicates that, in circumstances where the building is demolished shortly after it is sold, it may be reasonable to conclude that the sale was essentially one of land and that the price was in consideration only of land.
As we understand it, your question is whether subsection 13(21.1) of the Act can apply to determine the taxpayer's proceeds of disposition of the building for the purposes of paragraph (a) of the description of parameter F in the definition of "undepreciated capital cost" in subsection 13(21) of the Act if it is accepted that it is reasonable to allocate the vendor's sale proceeds only to the land.
Our Comments
It would appear that the taxpayer is misreading paragraph 7 of Interpretation Bulletin IT-220R2 (as amended by Special Release dated February 11, 1994). That paragraph discusses the allocation, pursuant to section 68 of the Act, of a lump sum proceeds of disposition between land and building. In our opinion, the comments in paragraph 9 of Interpretation Bulletin IT-220R2, which were amended by Special Release dated February 11, 1994, are applicable in the taxpayer's situation.
While section 68 provides a general rule that general rule does not override more specific provisions such as subsection 13(21.1) of the Act. In fact, both section 68 and subsection 13(21.1) may be applicable in a particular situation. The application of subsection 13(21.1) is discussed in paragraphs 9 through 16 of the aforementioned Interpretation Bulletin. Paragraph 13(21.1)(a) of the Act provides special rules to allocate proceeds between land and building when both a building and land subjacent to, or immediately contiguous to and necessary for the use of the building, are sold in the same taxation year. As indicated in paragraph 9 of IT-220R2, subsection 13(21.1) applies where the "proceeds from the building (including proceeds determined by the application of section 68) are less than the lesser of the cost amount and the capital cost of the building to the taxpayer". As such, even if an argument could be made that it is reasonable to allocate nil proceeds of disposition to the building under section 68, paragraph 13(21.1)(a) can still apply in the taxpayer's situation to determine the proceeds of disposition of the building for the purposes of paragraph (a) of the description of parameter F in the definition of "undepreciated capital cost" in subsection 13(21) of the Act.
We trust that these comments will be of assistance.
S. Parnanzone
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch