27 October 2008 Internal T.I. 2008-0288341I7 - 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.

Principal Issues: Whether a replacement property has been acquired where a taxpayer purchased as replacement property three quarters of land in 2006 which had been previously rented for XXXXXXXXXX years and sold the former property consisting of one quarter of land in 2007 that was close to an urban area.

Position: General comments

Reasons: Insufficient information

 								October 27, 2008

	XXXXXXXXXX  TSO XXXXXXXXXX 			HEADQUARTERS
								Charles Rafuse
								613-247-9237
	Attention : XXXXXXXXXX
								2008-028834

Replacement Property

This is in reply to your email of July 28, 2008, concerning the application of section 44 of the Income Tax Act (the "Act").

You have outlined a situation where a taxpayer purchased three quarters of land in 2006 which the taxpayer had previously rented for XXXXXXXXXX years (Property A) and sold one quarter of land in 2007 that was close to an urban area (Property B). The taxpayer then filed an election under subsection 44(1) to defer the recognition of the gain on the disposition of Property B by treating Property A as a replacement property (defined in subsection 44(5) of the Act) for Property B. Both Property A and Property B were used in the business of farming for XXXXXXXXXX . The proceeds of disposition of Property B was $XXXXXXXXXX and the cost of the replacement property (Property A) was determined to be $XXXXXXXXXX .

You have indicated that the taxpayer's representative has relied upon Rulings documents 2002-0156414 and 2003-0006993 and Income Tax Technical News 25 (ITTN 25) to support his position that the replacement property rules apply in the taxpayer's situation. In particular you have noted that the representative quoted the following excerpt from 2002-0156414:

"The reason they decide to sell is often based on the fact that the existing farmland is near an urban area and is very valuable compared to farmland in more remote areas. By selling the existing farmland, they can buy a larger farm in a remote area and increase the capacity of the farming operation. I assure you that these facts, in and by themselves, would not exclude the new farmland from being considered a replacement property for the existing farmland."

In addition, the representative indicated that part of the reason for the sale of Property B was that the land purchased, Property A, was closer to the taxpayer's home quarter area and the taxpayer had an opportunity to sell Property B as it was close to the urban area.

We understand that it is your position that the facts provided by the representative are not sufficient to demonstrate that the property purchased in 2006, Property A, was a replacement property; the taxpayer's situation appears to involve a business expansion rather than one property replacing another; and you are therefore prepared to accept only one quarter of Property A as replacement property of the one quarter of land that made up Property B. You have indicated that the representative is offering very little in the way of supporting facts for his position and would like our opinion based on the available facts described above.

Our Comments

The replacement property rules in the Act permit a taxpayer to elect to defer the recognition of income or capital gains where a former property is involuntarily disposed of, or a former property that is a "former business property" (as defined in subsection 248(1) of the Act) is voluntarily disposed of, and a "replacement property" is acquired. To be considered a replacement property, a particular property must meet all the requirements outlined in the definition in subsections 13(4.1) (for the rules in subsection 13(4) for depreciable property) and 44(5) (for the rules in section 44 for capital property) of the Act.

Generally, a particular property is considered a replacement property if it meets the following conditions:

(a) it is acquired to replace the former property and there is a causal relationship between its acquisition and the disposition of the former property;
(b) the particular property must be acquired and used for a use that is the same or similar to the use to which the former property was put;
(c) if the former property was used for the purpose of gaining or producing income from a business, the particular property must be acquired for the purpose of gaining or producing from the same or a similar business;
(d) where the former property was a taxable Canadian property (defined in subsection 248(1)), the particular depreciable or capital property is also a taxable Canadian property; and
(e) where the former property was a taxable Canadian property that is not treaty-protected property (defined in subsection 248(1)), the particular depreciable or capital property is also a taxable Canadian property that is not treaty-protected property.

For the situation that you have provided, it was indicated that three quarters of land (Property A) was first purchased closer to the taxpayer's home quarter and a quarter of land (Property B) close to the urban area was later sold. However, it is not evident from the information provided that there is a linkage between the two transactions and, accordingly, that the requirement in (a) above that there must be a causal relationship between the acquisition and disposition of the properties under consideration has been met. In this regard, we would observe that it is quite possible that such a causal relationship exists and may be established by a review of the circumstances surrounding the taxpayer's transactions such as the purchase financing, the date of the offer to purchase was made and the date the sale opportunity was identified.

Regarding the sentences from document 2002-0156414 quoted by the representative, we would note that in a previous paragraph in this document it is indicated that "there must be a correlation or causal relationship between the disposition of a former property and the acquisition of a replacement property" and this requirement is also confirmed in ITTN 25 and document 2003-0006993. We would also mention that, as explained in ITTN 25, the fact that a property is purchased under a business expansion would not, in and of itself, mean that the property could not be considered a replacement property. Accordingly, it is our opinion that if a causal relationship is found to exist between the two transactions under consideration (i.e., the purchase of Property A and the sale of Property B) and the other requirements are otherwise met, then the three quarters of land (Property A) would qualify as replacement property of Property B.

We trust this information is helpful.

Yours sincerely,

S. Parnanzone
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch