Subject: Definition of "Former Business Property Subsection 248(1) of the Income Tax Act ("the Act")
We are writing in response to your memorandum of September 20, 1991, concerning the issues raised by both the Mississauga District Office and the taxpayer's representatives concerning whether the Corporation named above is eligible for the capital gain deferral.
Our understanding of the facts is as follows:
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Taxpayer's Position
In summary the taxpayer's representatives discuss the word "use" and state that it has a broad meaning. In their view, being held for future expansion meets the meaning of the words "was used by him" pursuant to the definition of "former business property" found in subsection 248(1) of the Act. According to their representatives, actual use is not required and the taxpayer has adhered to the intent of the legislation. In their view, assets used primarily for the purpose of gaining or producing income from passive business are still used in the business. The word "use" in their view is of wide significance and holding land for expansion is a "use". It is their opinion that the land being held for expansion or redevelopment, even though vacant, was used in the business by 24(1) for the purpose of gaining or producing income from a business. Thus, the land constitutes a "former business property", and tax deferral under subsection 44(1) of the Act is available.
District Office Position
Audit maintains that the definition of "former business property" requires an actual use and not simply a contemplated use. The taxpayer must also show that the property had been used for the purpose of gaining income from a business. IT 491 supports these views. Vacant land has no actual business use thus cannot, qualify as former business property
Our Comments
To qualify for the rollover for the capital gains in subsection 44(1) of the Act, one of the requirements is that the property be, immediately before the disposition, a former business property of the taxpayer. "Former Business Property" is defined in subsection 248(1) of the Act and in order for an asset to meet the definition it must be a capital property of the taxpayer and that property must be used primarily (ie more than 50% of the time) by that particular taxpayer for the purpose of gaining or producing income from a business.
In the case at hand, the taxpayer has land that is, presumably, a capital property to the taxpayer however since the land is vacant land, in our view, it cannot be said that it is being used for the purpose of gaining or producing income from a business. Although it is not necessary to show a profit from the use of an asset, it is necessary to show a business use. Holding vacant land, in our view, cannot be considered a business use. In our view, if Finance had intended that taxpayers avail themselves of the provisions of section 44(1) of the Act by simply holding a capital asset in order to qualify that asset as a former business property, Finance could have employed the word "held". For example, the phrase "used by it in the year in, or held by it in the year in the course of carrying on an insurance business in Canada" is employed in subsection 85(1.1) where Parliament clearly meant to say held or used. Moreover, we disagree with the comments of the representatives that there is nothing in the definition to suggest that there had to be an "actual" use of the property, and to have this interpretation would require the additional word "actual". The word "actual" is not used any where before the word "use" in any section of the Act which indicates to us that Parliament did not see a need to add it. In this case, the words "used by him for the purpose of gaining or producing income from a business" are quite clear; in our view, they can only mean that the asset must contribute to a business use.
In our opinion the vacant land is not, immediately before the disposition, a former business property of the taxpayer. Interpretation Bulletin IT-491 paragraph 2, states that where no use was made of the property during the year of disposition, the Department will look to the use made of the property in the previous year. In the case at hand, the property is vacant land that does not appear to have ever been used in the business. Although it may be argued that an asset held for future expansion is used in the business, a further requirement of "former business property" is that the asset be used for the purpose of gaining or produce income. Unless the taxpayer can show that the vacant land itself was used to produce business income, the corporation cannot, in our opinion, avail itself of the rollover provisions. (Note: we are treating the land in question as the equivalent of vacant land because the District Office and the taxpayer are agreed that the residential house and the rent it brings in are merely incidental.)
Furthermore, tax case Lefebvre et al v. M.N.R. (91 DTC 192) is relevant; the only issue in that case was whether, the lands immediately before disposition were used by the taxpayer "primarily for the purpose of gaining or producing income from a business" ie consisted of "former business property". The tax court judge concluded that the appellant did not use the subject land in connection with any business. Although ownership in that case was an issue that would have disallowed the rollover provision, nevertheless, even if the appellants had ownership in the entire period as claimed, they would have been required to show that there was, during the period, a business use for the land in dispute.
Accordingly, in our view, non use does not constitute use (see paragraph 15(a) - lT-259R2). While it is true that corporations may acquire any asset they desire, until that asset is actually used rather than simply held in the business it cannot qualify for the provisions dealing with use for the purpose of gaining or producing income from a business.
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for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch