A May 29, 2026 Tax Court of Canada case reviewed whether two real estate properties were held on account of income or capital, and if there was a change in how they were held prior to their sale in 2017 that resulted in gains of $13.25 million. CRA’s administrative comments indicate that the gain on the sale of property should be reported entirely in the year the property is disposed of and apportioned between income (full gain is taxed) and capital gains (only half the gain is taxed) based on the value when the nature of the property was converted from capital to inventory.
The properties were originally acquired in 1996 and 1998 and were used for many years as income-producing commercial rental properties. While discussions to convert the properties to residential condominiums for sale began in 2005 and 2006, the first development agreement was not signed until 2008, rezoning was approved in 2010 with financing approved in 2011 and demolition and construction began in 2012. In 2008, the properties were rolled into a new corporation that eventually sold them in 2017.
The taxpayer argued that the properties were acquired and held as capital assets, resulting in $13.25 million of capital gains. The taxpayer argued that development planning activities did not, by themselves, change the character of the properties from capital to inventory.
CRA argued that all gains on both properties were business income. CRA relied on the 2008 rollover date as the relevant acquisition date for determining the taxpayer’s intention (income or capital) rather than the 1996/1998 acquisition dates by the ultimate ownership group.
Taxpayer wins. The court disagreed with CRA’s approach in determining that the gains were business income. The court found that the original intention was to hold the properties on account of capital, based on the ultimate ownership group’s intention when they acquired the properties in 1996/1998, rather than on the intention on the date when the property was rolled over (as asserted by CRA). The question was then whether, and if so, when, the properties were converted from capital property to inventory.
The court accepted the taxpayer’s testimony that, although they were exploring the possible conversion of the commercial rental properties to residential condos for resale, including entering into development agreements beginning in 2008 and obtaining rezoning approval in 2010, they had not decided whether they would proceed with that project, even if it was possible. The court accepted that these steps were exploratory and preparatory in nature and that the taxpayer retained the ability to abandon the project and continue holding the properties as capital property.
The court found that the properties were converted from capital property to inventory on September 16, 2011 when financing was secured, as this was the point that the taxpayer became irrevocably committed to the condominium project based on the terms of the development agreements. This was the point in time that the taxpayer’s unilateral right to terminate the development project ceased.
General information only, not tax advice for your situation.