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.
Principal Issues: Whether the replacement property rules in subsections 13(4) and 44(1) of the Income Tax Act (the "Act") would apply to allow a taxpayer to defer the capital gain and recapture of CCA on the disposition of a capital property
Position: General comments only
Reasons: Question of fact
XXXXXXXXXX 2003-005227
J. Gibbons, CGA
February 4, 2004
Dear XXXXXXXXXX:
This is in response to your letter dated September 27, 2003, which was included with the tax return for XXXXXXXXXX ("Xco"), a corporation wholly owned by you. In your letter, you requested confirmation that the replacement property rules in subsections 13(4) and 44(1) of the Income Tax Act (the "Act") would apply to allow Xco to defer the capital gain and recapture of capital cost allowance ("CCA") on the disposition of a capital property in XXXXXXXXXX.
You summarized the facts as follows:
? In XXXXXXXXXX, Xco sold its property located at XXXXXXXXXX (the "former property").
? The former property was used by XXXXXXXXXX ("the Related Company"), also wholly owned by you, and XXXXXXXXXX ("Yco"), to store their products.
? It became necessary to relocate the Related Company as a result of the substantial growth in its business in the last few years.
? In XXXXXXXXXX, Xco acquired a property at XXXXXXXXXX (the "new property") to replace the former property.
? The new property is used as a storage facility with an eventual view to moving the Related Company's business there.
? Xco has a XXXXXXXXXX taxation year-end.
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 a request for an advanced income tax ruling submitted in the manner set out in Information Circular 70-6R5. Also, opinions on completed transactions are ordinarily provided by local tax services offices. However, we have provided some general comments below, which we hope will be of some assistance to you.
Where a former property that is a "former business property" is voluntarily disposed of, and a "replacement property" is acquired, the recognition of all, or a portion of any resulting recapture of CCA or capital gain may generally be deferred pursuant to subsections 13(4) and 44(1) of the Act respectively. The replacement property must be acquired within one year of the end of the taxation year in which the disposition occurred (for a deferral of CCA recapture) or in which an amount becomes receivable as proceeds of disposition (for a capital gain deferral).
Paragraphs 13(4)(b) and 44(1)(b) of the Act require that the capital property, which is voluntarily disposed of, must be a former business property immediately before the disposition in order for the replacement property rules to apply. Subsection 248(1) of the Act defines a "former business property" to mean a capital property that was used by the taxpayer or a person related to the taxpayer primarily for the purpose of gaining or producing income from a business, and that was real property of the taxpayer or an interest of the taxpayer in real property, but does not include rental property of the taxpayer. As stated in paragraph 4 of Interpretation Bulletin IT-491, Former Business Property, it is our view that the words "used...primarily" refer to the use made of the property during the taxation year in which the disposition was made. This means that the former property must have been used by the taxpayer or a related person principally to earn income from a business (but not rent) during that period. Please refer to IT- 491 for more information on the meaning of "former business property".
If a former property falls with the definition of a "former business property," then some or all of the resulting capital gain and recapture on the voluntary disposition of this property may be deferred if a replacement property is acquired within the time limits outlined above. Pursuant to subsections 13(4.1) and 44(5) of the Act, a new property will only be considered a replacement property if, inter alia:
(i) it is reasonable to conclude that the property was acquired by the taxpayer to replace the former property;
(ii) it is acquired by the taxpayer and used by the taxpayer or a person related to the taxpayer for a use that is the same as or similar to the use to which the taxpayer or a person related to the taxpayer put the former property;
(iii) where the former property was used by the taxpayer or a person related to the taxpayer for the purpose of gaining or producing income from a business, it is acquired for the purpose of gaining or producing income from that or a similar business or for use by a person related to the taxpayer for such a purpose;
Please refer to paragraphs 9 to 21 of Interpretation Bulletin IT-259R4, Exchanges of Property, for more details on the above requirements.
If you require additional assistance in determining whether Xco can utilize the replacement property rules to defer the recognition of a capital gain and CCA recapture on the disposition of the former property, you may wish to consult with an audit technical advisor at your local tax services office. You should be prepared to address the issues of whether the former property qualifies as a former business property and whether the new property qualifies as a replacement property, within the meaning of these terms as outlined above. This can only be determined by looking at all of the facts and documentation including whether the former property was used primarily by the Related Company to earn business income, whether Yco is related to Xco, and the exact use to which the replacement property is put.
We trust that these comments will be of assistance.
Yours truly,
Wayne Antle, CGA.
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
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