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GST 201: CAPITAL PROPERTY

UNDERSTANDING THE FINE LINE BETWEEN CAPITAL & NON-CAPITAL PROPERTY

This is another in our GST 201 Series Reports, written to provide in-depth analysis of key topics under Canada's GST/HST regime.

In this Report, we focus on “capital property”, an overlapping concept under both the ITA and ETA that determines how special input tax credit rules apply to commercial activities.

Determining whether a property is capital is a fact-driven exercise, and even small factual differences can lead to very different results.

What Is “Capital Property”?

In fairly simplistic terms, capital property can be defined as any depreciable property and any property that, if disposed of, would result in a capital gain or loss for income tax purpose.  The concept generally refers to property that a business acquires to generate income over the long term, such as buildings, land, equipment, or machinery used in commercial activities – but again we simplify.

In practice, the determination of what is capital property is rarely straightforward.  One challenge lies in distinguishing capital property from inventory – property acquired for resale at a profit.  This distinction becomes particularly complex when capital property is deliberately or inadvertently converted to inventory.  Jurisprudence shows that the analysis turns on intention, the nature of the business and the property and the surrounding circumstances.

Capital Property vs. Inventory – How Do Courts Draw the Line?

In 4490380 Canada Inc. c. Le Roi (2025 CCI 154), the taxpayer corporation acquired and developed an office building with the intention of renting it out for long-term income.  Three years after achieving full occupancy, the corporation received an unsolicited offer and sold the property.  The Minister treated the property as inventory and assessed the profit of the sale on account of income.  The taxpayer objected and ultimately appealed to the Tax Court of Canada ("TCC").

At the TCC, the Court disagreed with the CRA's assessing position, reasoning that the taxpayer’s conduct was consistent with a long-term investment rather than a resale venture.  The sustained leasing efforts, long-term financing, and use of durable construction materials each pointed to an intention to earn rental income over time, and no secondary intention to resell at a profit.

GST Implications

The characterization of property as capital property is important for GST/HST purposes because it determines whether special change-in-use, self-supply, and adjustment rules apply under the GST legislation in the ETA.

For example, capital property is subject to distinct ITC change-in-use and deemed disposition rules that do not apply in the same way to non-capital property.  Capital property is also treated differently for GST/HST self-assessment rules when property is converted between taxable and exempt uses, and capital property status determines availability, timing and ITCs, particularly for real property and other high-value assets used less than 100% in commercial activities. 

Takeaways

The distinction between capital property and inventory is a nuanced, fact-driven determination with critical tax implications under both the ITA and ETA.

The analysis turns on intention, the nature of the business and the property, and the surrounding circumstances.  Businesses should seek legal advice to avoid unexpected tax consequences.

For help with Capital Property determinations, please click here.

Download a PDF copy of this Blog here.

For an updated Index of our GST/HST 201 Series Report, click here.