By Karen Cooper
A recent decision of the Tax Court of Canada serves as a reminder that not all land is held by a donor on account of capital and that the tax consequences of a particular gift may not be obvious.
In Staltari v. The Queen (2015 TCC 123), the Tax Court of Canada considered a donation by the taxpayer, a commercial real estate broker, of 19.5 acres of vacant land in rural Ottawa to the City of Ottawa in 2009. The land had been acquired by his father in 1983 and was transferred to him in 2000 for $70,000 because his father needed some cash. Having been advised sometime in 2003 that the City of Ottawa was about to implement a freeze on estate lot development in the area, the taxpayer engaged a consultant, who filed applications to re-zone and sub-divide the land. He also engaged other people to test the soil, to confirm the availability of well water by drilling test wells and to perform a watershed study, all of which was required in support of the applications. A road was also built to provide access to drill the test wells. During the application process, the City of Ottawa raised a concern that the land was close to environmentally sensitive land and commissioned a wetland study. The Ministry of Natural Resources came onto the land to assess its environmental status and told the taxpayer about the possible advantages of donating the land. He then researched online the possibility of a donation and came to the conclusion that the City of Ottawa would be a qualified donee and began the process of making an ecological gift. The Minister of the Environment certified the land as ecologically sensitive and also certified the fair market value of the land as being $1,935,000. The land was donated to the City in 2009 and the taxpayer used $875,000 of the ecological gift receipt amount to claim a donation tax credit for his 2009 taxation year. He treated the disposition as a capital transaction, the gain from the gift was a capital gain and the taxable half of the capital gain was deemed to be equal to zero by virtue of paragraph 38(a.2) of the Income Tax Act (Canada) (the “ITA”).
CRA reassessed the taxpayer to treat the gift of land as a disposition of inventory and included the value of the land less its original cost in the taxpayer’s income from a business for his 2009 taxation year. In response to the taxpayer’s appeal of the reassessment to the Tax Court of Canada, the Minister of National Revenue argued that the land was inventory because the taxpayer was a real estate specialist who often sold properties for others and occasionally for himself, the land was acquired by the taxpayer as part of a business scheme, as evidenced by the fact that the taxpayer had held real estate through several corporations and the land was held in much the same fashion, the taxpayer had built properties in the past (the row of four townhouses and his own home) and had a current scheme involving the construction and sale of condominiums. In the alternative, counsel submitted that the purchase and donation of the land was an adventure or concern in the nature of trade with the result that the gift of the land triggered income from a business. The donation was akin to an unsolicited offer of purchase that was accepted by the taxpayer, the only difference being that instead of there being a sale price, the ITA deemed the proceeds of disposition to be equal to the fair market value of the land.
In determining whether the disposition of the land to the City of Ottawa was on account of capital or income, the Court provides a detailed overview of the jurisprudence and indicates that when assessing whether a disposition of property gives rise to income from a business or a capital gain, regard must be had to all the surrounding circumstances in order to objectively test the taxpayer’s assertions of intent with respect to the property. The Court then found that there was no evidence that when the taxpayer acquired the land he did so in connection with a business operated by him. Further, the steps taken from 2003 forward to subdivide and rezone the Land do not in and of themselves establish the existence of a business in the ordinary sense of that word (i.e., without regard to the inclusion of an adventure or concern in the nature of trade). The Court found that the taxpayer’s application for subdivision approval before donating suggested that a secondary intention of developing and selling the land may have partly motivated the taxpayer’s original purchase. However, “a secondary intention to resell at a profit only acquires importance where a taxpayer follows through on that intention,” whereas the land was donated instead, i.e., “any secondary intention to profit that he may have had became irrelevant once he chose to donate the Land.”
This suggests that real estate whose sale would be on income account may be converted to capital property if it is donated instead. Specifically, in paragraphs 98 and 99, Justice Owen states as follows:
 As in Whent, Mr. Staltari had no ascertainable primary intention to profit when he purchased the Land and any secondary intention to profit that he may have had became irrelevant once he chose to donate the Land to the City of Ottawa. His decision to donate the Land cancelled any “nature of trade” that his acquisition and ownership of the Land may have had because of a secondary intention. In short, where only a secondary intention is in issue, the character of the adventure or concern as a capital transaction and not as being “in the nature of trade” is dictated by the absence of any profit motive associated with a bona fide gift.
 The courts have recognized that it is possible to make a “‘profitable gift” because of the favourable income tax consequences of certain gifts, particularly where the donated property is acquired for a bargain price. However, favourable income tax consequences do not, in and of themselves, vitiate the existence of a gift, nor do they give rise to a profit for the purposes of the ITA. In my view, it is wrong to suggest that a gift of the Land is akin to an unsolicited offer to purchase the Land or that the “profit” from the gift (in the sense of the favourable income tax consequences) imbues the transaction with the quality of trade.
The Court goes on to further consider whether the existence of substantial tax benefits resulting from a gift impacts the determination of whether a gift has been made and whether the transaction results in a “profit” and states as follows:
 It is therefore clear that the nature of the gift as a transfer of property for no consideration is not changed simply because there are favourable income tax consequences to the donor. This is so even though the donor is deemed to have received fair market value proceeds of disposition because of a gift inter vivos.
 As for the so-called profit, the Federal Court of Appeal held in Moloney v. Canada,  F.C.J. No. 905 (QL) and Canada v.Loewen, 1994 CanLII 3478 (FCA),  3 F.C. 83 that an advantage that flows exclusively from the provisions of the ITA is not a profit and that a business cannot consist of a transaction whose sole purpose is to reduce the tax that would otherwise be payable. Stated another way, income tax is calculated and paid after the income-earning process is complete and therefore a reduction of income tax because of a non-refundable income tax credit is not “profit” for the purposes of the ITA: … Accordingly, a profit motive cannot be attributed to Mr. Staltari simply because the gift of the Land yielded favourable income tax consequences.
While these statements should not be news for most practitioners and advisors, the case serves as an important reminder that not all gifts of land are necessarily on capital account and provides an example of how property that would otherwise be disposed of on income account could be converted to capital if donated, providing a useful planning tool for advisors looking for options in dealing with real estate.