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: Replacement Property Rules - Voluntary disposition of a motel and acquisition of a shopping plaza
Position: The replacement property rules in section 44 of the Act would not apply.
Reasons: Comments in paragraph 5 of IT-259R3
XXXXXXXXXX 2000-004362
M. Eisner
Attention: XXXXXXXXXX
October 2, 2000
Dear Sir:
Re: Replacement Property Rules
This is in reply to your letter of August 11, 2000, concerning the above-noted subject.
In the situation outlined, a corporation is operating a motel. You have indicated that, in operating the motel, rental revenue is earned by renting its rooms on a daily, weekly, or monthly basis. There is no restaurant or other facilities.
The corporation proposes to sell the motel, which will result in a capital gain, and use the proceeds to purchase a shopping plaza. You have asked whether the replacement property rules in section 44 of the Income Tax Act (the "Act") would be applicable.
Since your situation relates to actual proposed transactions, we refer you to our policy in Information Circular 70-6R3. Paragraph 22 of this circular explains that when a request for a technical interpretation relates to specific proposed transactions, an advance income tax ruling rather than a technical interpretation must be requested. We are, however, providing you with the following general comments which are not binding on the Agency.
General comments on the replacement property rules are set out in Interpretation Bulletin IT-259R3 "Exchanges of Property" (copy enclosed). In order to qualify for the replacement property rules in section 44 of the Act, there must be a disposition of a "former business property." According to the definition of former business property in subsection 248(1) of the Act, it does not include rental property, which is defined for this purpose as real property owned by the taxpayer and used principally for the purpose of gaining or producing gross revenue that is rent. With respect to your situation, paragraph 5 of Interpretation Bulletin IT-491 "Former Business Property" (copy enclosed), states that "the operation of a hotel or motel is a business that provides services and the revenue generated is not gross revenue that is rent."
We also note that if the shopping plaza is to qualify as a "replacement property", the requirements in subsection 44(5) of the Act must be met. For example, the taxpayer must acquire a replacement property that has the same or a similar use as the former property. As well, it must be reasonable to conclude that the property was acquired to replace the former property. In this regard, please refer to the comments in paragraphs 15 to 18 of IT-259R3.
We trust that our comments are of assistance to you.
Yours truly,
John Oulton
for Director
Business and Publications Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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