13 February 2001 External T.I. 2000-0031185 - ARREARS INT.-REPLAC. PROPERTY ACQUIRED

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: The calculation of arrears interest when a taxpayer disposes of a "former business property" in year 1 and does not pay the resulting income taxes on the capital gain and recapture of capital cost allowance ("recapture") by the due date: Whether the arrears interest will be reduced when the taxpayer acquires a "replacement property" in year 2, and if it matters whether security is provided or not.

Position: Arrears interest may be reduced to nil if the cost of the replacement property acquired in year 2 completely offsets the capital gain and the recapture from the disposition of the former business property in year 1.

Reasons: Based on the rules in subsection 161(1).

XXXXXXXXXX 	J. Gibbons, CGA
		2000-003118
February 13, 2001

Dear XXXXXXXXXX:

Your email of June 8, 2000, to Chantal Lacroix has been forwarded to us for reply. You enquired about the calculation of arrears interest in a situation where subsections 44(1) and 13(1) of the Income Tax Act (the "Act") apply. You are concerned about the calculation of arrears interest when a taxpayer disposes of "former business property" in year 1 and does not pay the resulting income taxes on the capital gain and recapture of capital cost allowance ("recapture") by the due date. You wish to know whether the arrears interest will be reduced when the taxpayer acquires a "replacement property" in year 2, and if it matters whether security is provided or not.

As you noted, paragraph 3 of IT-259R3, "Exchanges of Property," states that the interest on unpaid taxes will continue to accrue at the appropriate prescribed rates subject to being reduced by interest credited on any subsequent reassessment giving effect to the deferral. The method for calculating arrears interest is provided by subsection 161(1) of the Act, subject to the special rule in subsection 161(7) for certain types of adjustments. Under subsection 161(1), arrears interest begins to accrue on the taxpayer's "balance due day". In general terms, interest is charged on the amount, if any, by which the taxes payable under Parts I, I.3, VI and VI.1 of the Act for the year exceed the payments made on or before this date on account of the taxpayer's taxes payable for the year. Accordingly, any time the amount of taxes payable for the year is adjusted, other than for reasons set out in subsection 161(7), it will have effect as of the balance due day. In this regard, "balance due day" is defined in subsection 248(1) of the Act.

The foregoing means that, when the taxpayer acquires a replacement property in year 2 pursuant to the rules in subsection 44(1) of the Act, it will result in the reduction of the arrears interest which arose in year 1 as a result of the taxpayer not paying the income taxes on the capital gain and recapture on the disposition of a former business property in year 1. Accordingly, such arrears interest may be reduced to nil if the cost of the

replacement property acquired in year 2 completely offsets the capital gain and the recapture from the disposition of the former business property in year 1. In regard to the provision of security by a taxpayer, it is our view that this does not affect the calculation of arrears interest.

We trust that these comments will be of assistance.

Yours truly,

John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate

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