Subsection 45(1) - Property with more than one use
Paragraph 45(1)(a)
Cases
CAE Inc. v. The Queen, 2013 DTC 5084 [at 5944], 2013 FCA 92
The taxpayer, which leased flight simulators which it had manufactured, subsequently sold those simulators. The Minister denied capital cost allowance claims of the taxpayer made prior to the sales on the grounds that the simulators were inventory.
Noël JA found that as ss. 45(1)(a) and 13(7)(a) applied to conversions of capital property (including depreciable property) from income-producing use into use as inventory (as well as to conversions into personal use), the claiming of capital cost allowance in the initial years was not inconsistent with a subsequent sale of the simulators on income account. (However, two of the simulators nonetheless were inventory in the years they were being leased by the taxpayer as two airlines had options to purchase them.)
Duthie Estate v. The Queen, 95 DTC 5376 (FCTD)
A change of use for purposes of s. 45(1)(a) from personal-use capital property to real estate inventory occurred in June 1981 at the time the taxpayer made a decision to proceed with the development of the property as a condominium project on the recommendation of a consultant's report and thereupon retained a project manager and instructed it to prepare a master plan for the property and a concept plan for the units. (The development plans later were abandoned with the worsening economy in 1981). Furthermore, there was insufficient evidence that the taxpayer intended to carry on the development business through a corporation rather than directly. Rothstein J. stated (at p. 5382) that "I do not think moving off the land or physical change constitute conditions precedent to a change of use".
Derlago v. The Queen, 88 DTC 6290, [1988] 2 CTC 21 (FCTD)
A taxpayer who purchased residential real estate in 1966 with the intention of renting it out until retirement and thereafter using it for his retirement home was deemed to dispose of the property in 1980 when he commenced occupying the property as his retirement home. Since the deemed disposition occurred in 1980, it should be assumed, in the absence of any provision to the contrary that he received the proceeds at the time of disposition.
See Also
Sidhu v. The Queen, 2004 DTC 2540, 2004 TCC 174
The taxpayer, who had used a property as a rental property for nine years and then allegedly used the property as a temporary residence before disposing of it at a gain, had failed to meet the burden of proof of satisfying the Court "that it is reasonable to find on the evidence that the occupation of the subject property was an unequivocal use inconsistent with the original use or, at least, that such occupation was not a use reasonably consistent with the original use". Hershfield J. noted (at p. 2545) that "the brief occupation by the owner that follows during a pre-sale period is not necessarily a use that is inconsistent with the prior rental use of the property".
Hewlett Packard (Canada) Ltd. v. The Queen, 2003 DTC 1324 (TCC), rev'd 2004 DTC 6498, 2004 FCA 240
In October every year the taxpayer acquired a new fleet of automobiles for use by its employees and transferred possession of the previous year's fleet to the vendor (Ford) or to an auctioneer acting for Ford. The Crown alleged that in October (before the taxpayer's October 31 year end) the old fleet had ceased to be used for an income-producing purpose, with a result that there was a deemed disposition thereof. In rejecting the submission, Hershfield J. stated (at p. 1338):
"Taking property out of use should not be a sufficient reason by itself to find that it is no longer part of the income earning process until a positive act putting the property to a different use has commenced .... [S]teps taken to help ensure a more profitable resale of a capital asset does not constitute a change in use."
Willis v. The Queen, 2003 DTC 1081, 2003 TCC 575
The taxpayer had acquired seven lots adjacent to their principal residence as a protective greenbelt. Due to a change in their personal circumstances, they later sold five of the lots at a rate of approximately one every two years. Bowman A.C.J. indicated that if the taxpayer had argued that the properties had never lost their quality of capital properties, he would have been hard put to refuse to give effect to that argument. However, the Crown's assumption of fact that there had been a change of use in 1986 had been thoroughly demolished, and the alternative that the property remained capital throughout had not been advanced by either party, so he considered himself bound to accept the admission made by counsel for the taxpayers that there had been a change of use on January 1, 1992 giving rise to a deemed disposition at fair market value.
Roos v. The Queen, 94 DTC 1094 (TCC)
Land which the taxpayers acquired as capital property for use as a tree nursery was converted into inventory when they made formal applications to the Ministry of Municipal Affairs and Housing for a plan of subdivision for a particular block of lots. "By this time they are fully committed to proceeding with the subdivision and had progressed far enough that their change of intention was evident from their affirmative acts." (p. 1099)
"No actual construction work nor any other type of work had been carried out on his property ... In my view, paragraph 45(1)(a) of the Act contemplated in the situation as in the present one a physical change in the use of the property."
Accordingly, no loss was realized when the property later was disposed of for less than its 1981 value.
Jones v. MNR, 90 DTC 1849 (TCC)
Five acres of land which the taxpayer was using for his personal residence were found to have been converted to inventory at the time that he and his neighbour authorized a firm of consulting engineers to proceed with work to develop the land as a residential subdivision (1975) rather than at the time when the neighbour, without the objection of the taxpayer, started pursuing the possibility of such a development occurring (1973).
Administrative Policy
25 September 2015 T.I. 2015-0596921E5 - Conversion from inventory to capital
Do the rules in s. 45(1) apply where a home builder, who initially held a property as inventory, commenced to use it for his personal use, having regard to "2013-0493811C6, which discussed the CRA's views on C.A.E. Inc. v. The Queen, 2013 FCA 92"? CRA responded:
[In] 9335765… the CRA indicated that the rules in subsection 45(1) would not apply where real estate held by an individual as inventory is permanently converted to a capital property that is personal use property ("PUP")… [and] that the treatment of any gain on the ultimate sale of the particular PUP would not give rise to a gain or loss on income account. …
[This] continues to represent the CRA's views.
26 November 2013 Annual CTF Roundtable Q. , 2013-0493811C6
Respecting the statements in C.A.E. that the change of use rules apply to the conversion of inventory to depreciable property or vice versa, CRA stated that it did not agree. Among other concerns:
[I]t would be challenging for both taxpayers and the CRA to apply the change in use rules in the manner outlined by the FCA. Reporting requirements and potential tax liability for every change from inventory to (income-earning) capital use, and vice versa, could represent a significant compliance and administrative burden. …
[T]he CRA will not be changing its general position on the change in use rules as currently presented in Interpretation Bulletins IT-102R2 and IT-218R.
21 February 1994 T.I. 5-933576
Because the application of s. 45(1) is limited to capital property for purposes of the determination of capital gains and losses in accordance with subdivision c, there is no deemed disposition where real estate that is held by an individual is converted from inventory to a personal-use capital property.
8 July 1992 T.I. 5-920633
Where a corporation has acquired vacant land as capital property and not for an income-producing purpose and changes the use of the land by subdividing it into lots and adding services, the exact time of the change in use will be determined in accordance with IT-218R, paragraph 12.
1992 A.P.F.F. Annual Conference, Q. 18 (January - February 1993 Access Letter, p. 57)
A taxpayer who acquires vacant land for one use and, at a later date, starts to use it to generate income, will have s. 45(1)(a)(i) apply at the time of the change in use.
19 June 1990 T.I. (November 1990 Access Letter, p. 12, ¶1526)
Where an individual, who had been a full-time farmer, decided to give up farming to work in a different occupation, but retained the farmland and continued to live in the farmhouse, this would not be considered to constitute a change of use for the purposes of s. 45(1).
IT-102R2 "Conversion of property, other than real property, from or to inventory" 22 July 1985
8. Where capital property is converted to inventory, the action of conversion does not constitute a disposition within the meaning of paragraphs 13(21)(c) and 54(c). It is, however, recognized that the ultimate disposition of a property that was so converted may give rise to a gain or loss on capital account, a gain or loss on income account or a gain or loss that is partly capital and partly income. Accordingly, with respect to capital property that has been converted to inventory, taxpayers may calculate capital gains or losses, if any, on the basis that a notional disposition of such property occurred on the date of conversion.
IT-218R "Profit, Capital Gains and Losses from the Sale of Real Estate, including Farmland and Inherited Land and Conversion of Real Estate from Capital Property to Inventory and Vice Versa" 16 September 19864
10....where real estate is converted from capital property to inventory...for real estate that is used for the purpose of gaining or producing income from a business or property, its conversion to inventory will not constitute a change in use...and the proceeds from its ultimate sale will be treated in accordance with 15 below....
12. Vacant land that is capital property used by its owner for the purpose of gaining or producing income will be considered to have been converted to inventory at the earlier of
(a) the time when the owner commences or causes the commencement of improvements thereto with a view to selling it, and
(b) the time of making application to the relevant authority for approval of a plan to subdivide the land into lots for sale, provided that the taxpayer proceeds with the development of the subdivision.
13. The units in a multi-unit residential apartment, or an office, warehouse storage building or any similar structure that is held as capital property by the owner will be considered to have been converted to inventory at the time when application is made to the relevant authority for approval to change the title to any such building to strata title, provided that the owner proceeds with the sale of the units.
Articles
Harris, "Tax Aspects of Condominium Conversions and Lease Inducement Payments to Recipients", 1986 Conference Report, c.45.
Subsection 45(2) - Election where change of use
See Also
Bullard Estate v. The Queen, 2004 DTC 2717, 2004 TCC 249
Campbell J. found that because the deceased taxpayer did not make a s. 45(2) election in a return for 1990, she was prevented from doing so at a later date due to the wording of s. 45(2) and went on to state (at p. 2724):
"If the Appellant had properly filed an election in 1990, to elect the property for the principal residence exemption, but continued to treat the property as a rental property including a claim for capital cost allowance, I believe the election would be valid but she simply would have been reassessed at some point and prevented from making the rental deductions."
Administrative Policy
11 October 2013 APFF Roundtable Q. , 2013-0495621C6 F
Is a duplex or triplex a single property (subject to the land-building allocation) for purposes of ss. 45(2) and (3)? CRA responded (TaxInterpretations translation):
...If there is a single property under the private law…there is a single property for purposes of section 45.
22 August 2014 T.I. 2014-0541171E5 - Late 45(2) Election filed by executer
Mr. A rented out his home during his final years in a nursing home. Would CRA accept from his executor a late-filed s. 45(2) election for the home made in Mr. A's final income tax return? CRA stated:
[G]enerally, the fact that an executor late-filed the subsection 45(2) election on behalf of a deceased taxpayer, would not, in and of itself, prevent the CRA from accepting the election. However, a late-filed election accepted by virtue of subsection 220(3.2) of the Act is subject to penalty as set out in subsection 220(3.5).
25 September 2013 T.I. 2013-0485751E5 F - Rescinding 45(2) election by a non-resident
If a non-resident holding Canadian real estate rescinds, in a subsequent taxation year, a s. 45(2) election that was made with respect to the property, when must the application for a s. 116 certificate be made? CRA stated (TaxInterpretations translation):
[W]hen the taxpayer rescinds the election, ITA subsection 45(2) provides that the taxpayer is deemed to have commenced to use the property [for an income-producing purpose] on the first day of the subsequent year. This deemed use results in a deemed disposition of the property at that moment. …[T]he disposition of the taxable Canadian property occurs on the first day of such subsequent year during [sic, for] which the non-resient rescinds the election previously made under ITA subsection 45(2). The notice to the Minister pursuant to ITA section 116 respecting the disposition…must be submitted within 10 days folowing the disposition, namely within 10 days following the first day of such subsequent year.
13 February 2013 Memorandum 2012-0448391I7 - Validity of late-filed election and designation
The taxpayer, who sold a duplex to a non-arm's length person, filed his tax return on time without disclosing the disposition, then approximately two years later late-filed an s. 45(2) election. CRA stated:
Since subsection 45(2) is listed in paragraph 600(b) of the Regulations, a subsection 45(2) election can technically be late filed providing the requirements under paragraphs 220(3.2)(a) and (b) of the Act are met. However, [there is a requirement] that no CCA has been claimed on the property since the change in use has occurred....
Based on the legislation and the administrative positions of the CRA, if a late-filed election is required under a prescribed provision and the reason for the taxpayer's request falls under one of the taxpayer relief provisions provided under paragraph 56 of IC07-1, then there is no authority for the CRA to deny the late-filed election.
8 July 1992 T.I. 5-920633
A taxpayer will be allowed to elect under s. 45(2) in relation to a capital property even where it is not a depreciable property subject to the rules contained in s. 13(7)(b).
1992 A.P.F.F. Annual Conference, Q. 18 (January - February 1993 Access Letter, p. 57)
An election may be made under s. 45(2) in respect of capital property which does not constitute depreciable property to which s. 13(7)(b) otherwise would apply.
Subsection 45(3) - Election concerning principal residence
Administrative Policy
13 November 2014 T.I. 2014-0535611E5 F - Changement d'usage suivi d'un roulement
After an individual made the s. 45(3) election, the principal residence was transferred on a rollover basis under s. 73(1) to the individual's spouse. Did this trigger the accrued gain which was deferred through the s. 45(3) election? CRA stated (TaxInterpretations translation):
[T]he transfer of the principal residence by the individual to the spouse occurs at the ACB. The realization of the accrued gain, at the time of the change of use, thus would be reported when the spouse disposes of the principal residence.
25 February 2013 Memorandum 2012-0440371I7 F - Changement d'usage - Duplex
The Directorate confirmed the position it took in 2011-0417471E5, which it summarized as follows (TaxInterpretations translation):
...a partial change in use of a duplex for purposes of paragraph 45(1)(c) of the Act occurs when a taxpayer, who has been occupying a duplex unit as principal residence and who owns both duplex units, integrates the second unit (which until then was rented to a third party) into the first through a major renovation. As the election contemplated under subsection 45(3) of the Act canot be utilized when the change in use of property is partial only, a taxpayer in this situation cannot make the election....
29 November 2012 T.I. 2012-0433451E5 - Change in Use - Election under 45(3)
In 2007 the taxpayer and his spouse leave their principal residence for new employment and rent out the residence until 2011 without making the s. 45(2) election and without claiming CCA.
As they did not make the s. 45(2) election, there would be a deemed disposition and reacquisition of the residence at fair market value in 2007; and they will be considered to have commenced to use the property for an income-producing purpose in 2007. CRA stated:
In 2011, when the taxpayer and his spouse moved back to their former principal residence, changing its use from income producing to personal use, there would be a change in use again, and if its value had increased in the meantime, a taxable capital gain would arise from the deemed disposition of the property under paragraph 45(1)(a)(iii) of the Act. However, subsection 45(3) of the Act allows a taxpayer to elect to defer the recognition of the capital gain until an actual disposition of the property.
Pursuant to subsections 45(3) and 45(4) of the Act, an election can only be made where a capital property that was acquired by a taxpayer for the purpose of gaining or producing income ceases to be used for that purpose and becomes the "principal residence" of the taxpayer and where no CCA was previously claimed and allowed in respect of the property.
Since no election under subsection 45(2) was filed in 2007, pursuant to paragraph 45(1)(a), the property would be deemed to have been disposed of and reacquired immediately by the taxpayer and his spouse for the purpose of gaining or producing income in 2007. Therefore, on the change in use back to their principal residence in 2011, the taxpayer and his spouse would be able to elect under subsection 45(3) and have their property qualify as a principal residence for the years 2008, 2009 and 2010, providing all the relevant conditions are met.