My client is considering purchasing vacant land as an investment. I know that the costs of acquisition and improvements can be capitalized, but what about Property Taxes?
Perhaps the situation of your client could be evaluated against things such as ITA S18(2) and ITA S53(1)(h) for the non-depreciable property.
By essence, property taxes are recurring obligations. They do not add value to the property. Therefore, they should be expensed and not capitalized.
" solutions2f: By essence, property taxes are recurring obligations. They do not add value to the property. Therefore, they should be expensed and not capitalized."
Great care should be taken regarding this client…
I think that you might find that CRA are much more a fan of S18(2)(b) than you appear to be…
I was given the choice by an CRA auditor for a client. If the taxpayer does not add recurring or maintenance expenses, only improvements to a property it will be considered capital gain when sold. If he claims or adds property taxes and other maintenance expenses to the cost, the property will be considered inventory and the gain will be considered profit. A calculation of each situation may be interesting.
Thanks everyone, lots of food for thought. Norman, it sounds as though whether to capitalize those costs or not would indicate “intention”.
Problem with intention in a case like this is that intentions may change depending on future or currently unknown events.
Joe.justjoe.1 has the correct answer: read ITA 18(2)! CRA auditors’ “discretion” notwithstanding, it is not a matter of choice, it is a matter of following the law. That said, there may be room for interpretation in some circumstances. For example, what does it mean to “use” vacant land in the course of a business? If you park a trailer on a vacant parcel of land, how much land are you “using”?
Gaymwise mentioned “improvements”. That word suggests the owner may be developing the land.
Thanks Keith – the client is doing no improvements, I just popped that in to confirm that I was aware that improvements can be added to ACB. Heard from the client last night that he has purchased the land, that it is a building lot in a new subdivision and that he has paid GST on the purchase price. That sound like an “adventure in the nature of trade”. We all love adventures, but I’m thinking no Capital Gains Exemption.
If your client bought the land with intent to sell it later (or build a house for resale), then it would be considered inventory (i.e. not a capital asset). Carrying charges on vacant land inventory (i.e. interest and property taxes) cannot be expensed (see ITA 18(2) as Joe mentioned), but can be added to the inventory cost per ITA 10(1.1):
Specifically note paragraph 4:
“4. Subsection 10(1.1) provides for an addition to a taxpayer’s cost of inventory of land of the amount of carrying charges for which no deduction is permitted under subsection 18(2).”