When a taxpayer disposes of a combination of land and buildings, ITA 13(21.1)(a)contains a special rule for determining the amount of proceeds to be allocated to the building. If applicable, this special rule increases the amount of the proceeds that will be allocated to the building. What is the tax policy objective of this special rule?

Question

Quizplus · Accepted Answer

The Answer is When a combination of land and buildings is sold, there will often be a capital gain on the land component, only one-half of which will be included in the selling taxpayer's Net Income For Tax Purposes. If the fair market value of the building is less than its UCC balance and the building is the last asset in its class, there will be a terminal loss on the building. This terminal loss will be 100 percent deductible and can be used to offset the one-half of the capital gain on the land that was included in the taxpayer's Net Income For Tax Purposes. This will, of course, tempt taxpayers to allocate a larger amount of the total proceeds to the land and a correspondingly smaller amount of the total proceeds to the building. The special rule in ITA 13(21.1)(a)increases the building proceeds to the point where any terminal loss will either be eliminated, or reduced to the point that it does not offset any capital gain on the land.

When a Taxpayer Disposes of a Combination of Land and Buildings