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: The application of the replacement property rules to rental properties
Position: Gave general comments on the definition in 248(1) re former business property and explained that there was a specific exclusion for rental properties
Reasons: There is a specific legislative rule that the old property cannot be a rental property.
XXXXXXXXXX John Oulton
1999-000306
July 27, 1999
Dear XXXXXXXXXX:
Re: XXXXXXXXXX
This is in reply to your letter of July 12, 1999, concerning the application of the replacement property rules in section 44 of the Income Tax Act (the Act) to transactions completed by the above noted individual.
You have indicated that an auditor of the XXXXXXXXXX Tax Services Office is currently reviewing certain transactions of XXXXXXXXXX, that relate to replacement properties acquired by him in earlier years. Apparently audit officials are of the view that the replacement property rules in the Act do not apply to these transactions. Before they were undertaken, XXXXXXXXXX claims that he was advised by an official in the XXXXXXXXXX office, that the recognition of the capital gain could be deferred using the replacement property rules in the Act. It seems that this was based on the understanding that since he had a GST number for the property, it would be a “business property” for income tax purposes. You want us to confirm that, because these are business properties for GST purposes, XXXXXXXXXX should be allowed to defer recognition of capital gains on certain of these transactions.
Because the issues raised in your letter are currently being reviewed by audit officials, we are unable to provide definitive comments relative to any of the transactions in question. However, we offer the following general comments which may be of some assistance to you in explaining the law to your client.
In general terms, subsection 44(1) of the Act allows a taxpayer to elect to defer the recognition of a capital gain when a former business property is voluntarily disposed of, and replacement property is acquired. A “former business property” as defined by subsection 248(1) of the Act, is capital property that is real property or an interest therein that is used by the taxpayer or a person related to the taxpayer primarily for the purpose of gaining or producing income from a business, but does not include a rental property. “Rental property” is also a defined term in subsection 248(1). It is defined to mean 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. Further, a replacement property is considered to be a replacement property of the former property if the requirements in subsection 44(5) of the Act are met. There is no tie-in to the GST rules in the excise tax legislation.
The income tax rules on replacement property and former business are explained in interpretation bulletins IT-259R3, Exchanges of Property, and IT-491, Former Business Property. These publications can be found on Revenue Canada’s internet site at www.rc.gc.ca and are also available from your local tax services office.
We hope that the above general comments will be helpful.
Sincerely,
John Oulton
For Director
Business and Publications Divison
Income Tax Rulings and
Interpretations Directorate
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