I am currently dealing with a corporation that holds vacant property and has not filed corporate returns for 10 yrs. Has now sold the vacant property and we need to bring corporate filings to date.
Shareholder has been injecting capital to cover carrying costs being bank charges, interest and Ptaxes.
What is best way to account for these expenses.
a) Do we expense yearly against zero income ?
b) Do we add to the value of the asset increasing the ACB?
Not expenses for the purpose of earning income, I’d add to the value of the asset and increase the ACB
The taxes and interest are (likely) not eligible to be added to the cost base of the land. These expenses can only be added to the cost of the land where the land was part of a business or property income earning endeavour. If the client was just holding land, the property taxes and interest can’t be added to the cost.
Thank you for the response Kevin.
To clarify, the properties are homes which were left vacant, the purpose was to eventually sell at a profit, so this was just speculative property purchases.
Would it be reasonable to assume that there will be a capital gain incurred and therefore expenses incurred during the vacancy period be used to offset such gains
If his business was selling homes, then it will be business income and the expenses should apply. The income wouldn’t be subject to capital gains.
In order to assess deductibility, a few more things need to be considered. The operative sections of the ITA would appear to be Sec18(2) and Sec 53(1)(h).
Sec 18(2) generally prohibits deduction on a current basis of interest and property taxes on vacant land*, unless the property “is used in the course of a business…” or “held primarily for the purpose of resale” (ie inventory).
Sec 53(1)(h) allows those costs DISALLOWED by virtue of the above to be added to the ACB. If the costs were non-deductible for any other reason, they remain a lost cost and may NOT be added to the ACB. (simplified explanation)
So…if the property was resold as inventory, the gain is fully taxable with interest and taxes deductible in current years, and the loss carried forward applied against the gain on sale.
Otherwise: nada.
*I see the property actually had dwellings on it so the above is moot. Different considerations will apply. That was stated while I was typing!!
The corp was set up and bought two properties 10 years ago. I wouldnt consider that in the business of selling homes so I dont believe these can be expensed on an ongoing basis but feel they should be accounted for once properties are sold
If you look in the ITA, subdivision B, starting with section 9, deals with business and property income while subdivision C, starting with section 38, deals with capital gains. The preamble of subdivision B says that “a taxpayer’s income for a taxation year from a business or property is the taxpayer’s profit from that business or property for the year”. Subdivision C, in Sec 39, says that “a taxpayer’s capital gain for a taxation year from the disposition of any property is the taxpayer’s gain for the year determined under this Subdivision ,”.
The determination of a gain makes no reference to rules in subdivision B (property and business income) so I think that pretty much rules out capital gains being included in property income.
A few years ago I did a s 116 clearance for an individual with a similar set of facts and CRA would not accept the addition of the property taxes to the ACB of the land. Their reason wat that it was “personal”.
“I am currently dealing with a corporation that holds vacant property”
Not exactly an accurate description, since further later description indicates that the corporation purchased land and buildings for a speculative purpose (“adventure or concern in the nature of trade”), intending to earn a (business income) profit upon sale, after holding them in passive inventory until that time. (There is zero income from property, nor any intention at any time of earning same, thus no eligible expenses for income from property)
As such, the revenue (proceeds of the sale of the real properties) is fully taxable as business income (NOT capital gains) in the year of sale for tax purposes, and the inventory should be costed accordingly (S10).
S230 requires that the corporation properly records all transactions in its books of account.
Thank you Joe
I didn’t mean to mislead with “vacant property”.
It is in fact residential property that has been left unoccupied therefore does fall under the definition of vacant property.
In summary, because it was bought for speculative reasons, it is considered “adventure or concern in the nature of trade” and therefore treated as fully taxable as business income.