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: Whether new land and new building will be considered a replacement property for former business property.
Position: Yes.
Reasons: Properties will satisfy requirements in paragraph 44(5)(a) and/or 13(4.1).
XXXXXXXXXX 2000-002888
XXXXXXXXXX , 2000
Dear XXXXXXXXXX :
Re: Advance Income Tax Ruling
XXXXXXXXXX (the "Taxpayer") XXXXXXXXXX
We are writing in response your letter dated XXXXXXXXXX , in which you requested an advance income tax ruling on behalf of the above-mentioned Taxpayer. We also acknowledge our telephone conversations of XXXXXXXXXX
To the best of your knowledge, and that of the taxpayers involved, none of the issues involved in the ruling request is:
i. in an earlier return of the Taxpayer or a related person;
ii. being considered by a tax services office or a taxation centre in connection with a tax return already filed by the Taxpayer or a related person;
iii. under objection by the Taxpayer or a related person;
iv. before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; and
v. the subject of a ruling previously issued by the Directorate.
Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended (the "Act"), and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.
Our understanding of the facts, the proposed transaction, and the purpose of the proposed transaction is as follows:
Facts
1. The Taxpayer is a taxable Canadian-controlled private corporation, XXXXXXXXX % of the shares of which are owned by an individual, XXXXXXXXX . The Taxpayer was incorporated under the laws of the Province of XXXXXXXXXX on XXXXXXXXXX . The taxation year-end of the Taxpayer is XXXXXXXXXX .
2. The Taxpayer's sources of income are:
XXXXXXXXXX
3. The Taxpayer and XXXXXXXXXX other associated companies that are headquartered in XXXXXXXXXX are subject to the Large Corporation Tax under Part 1.3 of the Act. Substantially all of the business activity of the associated corporations consists of XXXXXXXXXX
4. The associated or related corporations referred to in 2 and 3 above are related to the Taxpayer within the meaning of subsection 251(2) of the Act.
5. The Taxpayer owns XXXXXXXXXX (collectively referred to as the "former properties"), which are used by the group of related corporations for their XXXXXXXXXX operations. The land portion of the former properties consist of the following:
Acres
XXXXXXXXXX
In addition to the land above, the Taxpayer used to rent a XXXXXXXXXX (see 11 below.) The Taxpayer also rents a parking lot for its employees.
6. Located on Property 1 is a building (henceforth called the "Former Building") which is owned by the Taxpayer. The Former Building belongs to capital cost allowance (CCA) class 3 of Schedule II of the Income Tax Regulations and consists of XXXXXXXXXX .
7. While the former properties are separate, they are closely located. XXXXXXXXXX .
8. The Taxpayer has had a rash of thefts of XXXXXXXXXX in the past, to the point where its insurance company is refusing to insure the Taxpayer's property unless extensive security measures (fencing, monitoring, etc.) are implemented. The implentation of these additional security features would be costly in terms of additional buildings and personnel and, in the case of the rented yard, would be imprudent.
9. XXXXXXXXXX .
10. In XXXXXXXXXX , the Taxpayer offered to purchase for $XXXXXXXXXX , subject to an environmental certification, XXXXXXXXXX acres of land, hereinafter referred to as the "Replacement Land," from XXXXXXXXXX (the "Vendor") in the same vicinity as the former properties, at XXXXXXXXXX . The Vendor and the Taxpayer deal at arm's length. The Replacement Land has associated environmental problems, which the Vendor must remedy before the closing date. As a condition before the Vendor would proceed with the cleanup, the Taxpayer had to provide it with a $XXXXXXXXXX deposit. This deposit will be applied towards the purchase price or refunded on failure to obtain environmental certification. Currently the cleanup is in progress and it is anticipated that the closing will take place in XXXXXXXXXX .
11. XXXXXXXXXX .
12. The Replacement Land is very close to Property1 and Property 2.
13. Before offering to purchase the Replacement Land, the Taxpayer unsuccessfully tried to locate and purchase replacement land of a smaller size XXXXXXXXXX .
14. The Taxpayer has made enquiries to sever the Replacement Land into two parcels, but the planning authority indicated that severance of this land would not be entertained because of access problems. XXXXXXXXXX . As a result, it is apparent that the Replacement Land can only be purchased and used as a single unit.
15. Approximately XXXXXXXXXX of the Replacement Land will be lost in complying with site plan requirements such as landscaping, aprons, setbacks and berms.
16. Approximately XXXXXXXXXX of the Replacement Land (back end or south end of the property) is fallow land which will not be suitable to be used for XXXXXXXXXX operations, as major remedial work would need to be carried out, thus making it uneconomical. The Vendor did not use this area for productive use. This area consists of surface area retention ponds, drainage ditches, bull rushes and accumulated debris and rubble built up over several years.
17. Of the total of XXXXXXXXXX in the Replacement Land, approximately XXXXXXXXXX will be useable land.
18. Once the Replacement Land has been acquired, the Taxpayer will undertake the following activities:
a) Improve the Replacement Land per the site plan requirements as described in 15 above.
b) XXXXXXXXXX .
c) Erect a CCA class 6 security fence around the perimeter of the Replacement Land.
d) Construct a CCA class 1 building (the "Replacement Building") on the Replacement Land similar to the Former Building but with XXXXXXXXXX . The cost of construction is estimated to be $XXXXXXXXXX .
e) XXXXXXXXXX .
Proposed Transactions
19. The Taxpayer will sell Property 1, Property 2 and the Former Building. It is expected that the sale will be completed by XXXXXXXXXX .
20. The Taxpayer will acquire the Replacement Land described in 10 above from the Vendor, and shall undertake the activities described in 18 above. The Replacement Land will be acquired to replace Property 1 and Property 2.
21. The Taxpayer will erect the Replacement Building, as described in 18(d) above, on the Replacement Land before XXXXXXXXXX . The Replacement Building will be built to replace the Former Building.
22. The Replacement Land to be acquired from the Vendor and the Replacement Building to be erected by the Taxpayer will be operated as XXXXXXXXXX by the Taxpayer and used by the related group of corporations before XXXXXXXXX . The related companies will pay rent to the Taxpayer for such use.
23. The Taxpayer will file an election under subsection 44(1) of the Act for purposes of determining the capital gain on the disposition of Property 1 and Property 2 and the Former Building. The election will be filed in the Taxpayer's return for the year ending XXXXXXXXXX .
24. The Taxpayer will elect under subsection 13(4) of the Act for purposes of determining the proceeds of disposition of the Former Building. The election filed by the taxpayer under section 44, as noted in 23 above, will be deemed to be an election under subsection 13(4) pursuant to paragraph 44(4)(a) of the Act.
Purpose of the Proposed Transactions
The purpose of the proposed transactions is to permit the Taxpayer to relocate its XXXXXXXXXX operations to a location which will provide an integrated and secure
environment. As well, the Taxpayer prefers to invest money in its own property rather than paying rent for property it requires for its operations.
Rulings Given
Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions, and purpose of the proposed transactions, and the proposed transactions are completed as described above, our rulings are as follows:
A. The Replacement Land, inlcuding the cost of the improvements on the land, noted in 15 above, will constitute replacement property for Property 1 and Property 2, within the meaning of subsection 44(5) of the Act.
B. The Replacement Building, as noted in 21 above, will constitute replacement property for the Former Building within the meaning of subsections 44(5) and 13(4.1) of the Act.
C. The Taxpayer's capital gain on the disposition of Property 1, Property 2, and the Former Building will be determined in accordance with paragraph 44(1)(e) of the Act. The cost of the Replacement Land and the Replacement Building will be determined in accordance with paragraph 44(1)(f) of the Act.
D. The Taxpayer's "proceeds of disposition" of the Former Building will be reduced in accordance with paragraph 13(4)(c) of the Act.
E. For the purpose of calculating the "undepreciated capital cost" (as defined in subsection 13(21) of the Act) of the Replacement Building, the capital cost will be determined pursuant to paragraphs 44(1)(f) and 13(4)(d) of the Act.
Caveat
Nothing in this ruling should be construed as implying that the Canada Customs and Revenue Agency has agreed to or reviewed the tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above.
The rulings provided herein are subject to the limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996, and are binding on the Canada
Customs and Revenue Agency provided that the proposed transactions are completed before XXXXXXXXXX .
Yours truly,
XXXXXXXXXX
for Director
Business and Publications Division
Income Tax Rulings Directorate
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