16 September 1997 External T.I. 9716205 - REPLACEMENT PROPERTY

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Will an exchange of properties qualify under subsections 44(1) and 13(4) of the Act.

Position:

None

Reasons:

Question of fact. Not enough information provided.

J. Gibbons
XXXXXXXXXX 5-971620

Attention: XXXXXXXXXX

September 16, 1997

Dear Sir:

We are replying to your letter of April 21, 1997, addressed to the Surrey Taxation Centre, which was forwarded to us for our reply on May 30, 1997. You inquire whether “capital gains tax” can be eliminated by using the profits from the sale of one of your XXXXXXXXXX properties to build another property. We have assumed that your reference to “capital gains tax” means income taxes payable on taxable capital gains.

Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R3. The following comments are, therefore, of a general nature only.

Although income taxes payable on taxable capital gains cannot be eliminated, it is possible, by acquiring a replacement property, to defer the inclusion into income of all or part of a taxable capital gain on the sale of capital property, as well as the recapture of capital cost allowance on the sale of depreciable property. The authority for this relief is found respectively in subsections 44(1) and 13(4) of the Income Tax Act (the “Act”). However, these provisions apply only where the former property was involuntarily disposed of or was a “former business property.” We understand from your letter that you disposed of your property voluntarily. Accordingly, we will restrict our comments to dispositions of “former business property.”

The term “former business property” is defined in subsection 248(1) of the Act as real property of the taxpayer, other than “rental property”, that was used by the taxpayer or a related person primarily for the purpose of gaining or producing income from a business. Rental property is defined for this purpose as real property owned by the taxpayer and used in the particular year principally for the purpose of gaining or producing gross revenue that is rent. Accordingly, even though a property is used to earn business income, it would be disqualified as a former business property if it was used in the taxation year in which it was disposed of principally for the purpose of producing rent. However, if a property is leased by the taxpayer to a related person and is used by that related person principally for any purpose other than gaining or producing gross revenue that is rent, it is not included in the definition of rental property. For additional comments on the meaning of former business property, we refer you to the enclosed Interpretation Bulletin IT-491.

The new property must qualify as a “replacement property” within the meaning of subsections 44(5) and 13(4.1) of the Act. These provisions provide, inter alia, that the replacement property must be acquired by the taxpayer for the same or similar use as the use to which the taxpayer or a related person put the former property. In addition, where the former property was used by the taxpayer or a related person for the purpose of earning income from a business, the replacement property must be acquired by the taxpayer for the purposes of earning income from that or a similar business or for use by a related person for such a purpose. It should be further noted that, under proposed legislation in the Notice of Ways and Means Motion issued November 20, 1996, subsections 13(4.1) and 44(5) of the Act will add a further requirement that the new property be used by the taxpayer or a related person for the same or similar use as the use to which the taxpayer or a related person put the former property. We refer you to IT-259R2, a copy of which is enclosed, for further comments concerning this and other points relating to an exchange of property.

In the case of voluntary dispositions, replacement property must be acquired before the end of the first taxation year following the year that the proceeds of disposition become receivable. A taxpayer is considered to have acquired property at the time the acquisition would ordinarily be considered to have been made under the provisions of the Act and the general principles of law. For a discussion of when a building which is being erected by or acquired for the taxpayer is acquired, we refer you to paragraph 12 of Interpretation Bulletin IT-285R2, which we enclose for your convenience.

We trust that these comments will be of assistance.

Yours truly,

C. Chouinard
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

Encl.

cc Surrey Taxation Centre