Disposal of Land and Adjacent Building

Disposal of Land and Adjacent Building

  • When you dispose a land and an adjacent building together you are not allowed to have a terminal loss on the building.
  • You MUST use the terminal loss on the building to lower the proceeds of disposition on the land
Example
LandBuilding
Proceeds of disposition$ 10,000$ 5,000
Adjusted Cost Base (ACB)$ 4,000$ 8,000
UCC Balance $ 6,000

Before this rule kicks in:

Capital Gain on Land = $10,000-4,000 = $6,000

Terminal Loss on Building = $6,000-5,000 = $1,000

This rule will force the taxpayer to use the terminal loss on the building to reduce the proceeds on the land:

Capital Gain on the Land = ($10,000-1,000)-4,000 = $5,000

Terminal Loss on the Building = $NIL

What is the implication of this rule

Before this rule, taxpayers were able to abuse the system by arbitrarily allocating lesser proceeds to the building to trigger terminal losses. Terminal losses provide a tax advantage because it can be deducted against any source of income.

Finance came in and revoked this advantage by saying that any terminal loss on the building can only reduce the proceeds on the land (whenever a land and adjacent building were sold together).

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