5-903094
Dear Sirs:
Re: Request for Technical Interpretation Subsection 85(1.1) of the Income Tax Act (the"Act")
We are responding to your letter, dated October 26, 1990, in which you requested our opinion on whether "eligible property", as defined in subsection 85(1.1) of the Act, includes shares in a company holding land inventory.
In our view, unless such shares constitute either capital property or inventory to the holder, they will not be considered to be "eligible property" within the meaning of subsection 85(1.1) of the Act.
In your view, based on the decision in Ronald K. Fraser [No. 2] v. Minister of National Revenue, 64 DTC 5224, any gain on the sale of such shares would be categorized as an income gain.
Whether the gain on the sale of the shares would constitute an income gain or a capital gain cannot be determined without a review of all of the relevant facts. As the circumstances of sale are usually considered relevant in determining whether the property was held on income account, as an adventure in the nature of trade or on account of capital, it might not be possible to determine, prior to the ultimate sale to a third party, whether any gain realized on the ultimate sale would be considered to be an income gain. Further, even if a gain on the sale of the shares were to constitute an income gain, because the shares were held and sold as an adventure in the nature of trade, it is not clear that the shares would therefore constitute inventory to the holder.
The issues of whether property can be determined to be held as an adventure in the nature of trade prior to the ultimate sale thereof and whether property held as an adventure in the nature of trade constitutes inventory are currently before the courts in several cases, including Donald R. Bailey v. Minister of National Revenue, 90 DTC 1321, which is currently under appeal.
The foregoing comments are given in accordance with the practice referred to in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990 .
Yours truly,
for DirectorReorganizations and Non-resident DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch