17 November 2000 External T.I. 2000-0046035 - Replacement farm property qualified farm 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 farm properties qualified as replacement property and whether they were "qualified farm property".

Position: Question of fact

Reasons: Property which is a replacement property for a former business property which was qualified farm property would also be qualified farm property. Any other property acquired in substitution would be a question of fact.

XXXXXXXXXX 	2000-004603
		Cornelis Rystenbil, CGA

Attention: XXXXXXXXXX

November 17, 2000

Dear Sir:

Re: Meaning of "substituted" property as used in the definition of "Qualified Farm Property" in subparagraph 110.6(1)(a)(vii) of the Income Tax Act (the "Act")

This is in your reply to your request of September 7, 2000 in which you provide three hypothetical scenarios in which farm property was "substituted". You have requested our views on whether the "substituted" property falls within the phrase " ... the property or property for which the property was substituted" as used in the definition of "qualified farm property" in subparagraph 110.6(1)(a)(vii) of the Act.

Specifically, you have presented three scenarios involving land which a father owned and farmed from 1950 to 1981. During this time, the father's gross revenues from the farming business exceeded his income from other sources. The son inherited the land and carried on the business of farming. In two scenarios, the son's gross revenue from the business of farming did not exceed his revenues from other sources; in another scenario, the son's gross revenue did exceed his other revenue. You have indicated that the land would be qualified farm property of the son either because of the father's farming or his own farming. In all the scenarios, after 1987, the son sold the land and acquired, in substitution, new land which was used in the business of farming, except that in one of the scenario's, the son rented the new land to his brother for his brother to use in a farming business. You have asked for our views on whether the new land is qualified farm property.

Our Comments:

As indicated in Information Circular 70-6R3, confirmation of the tax consequences flowing from completed transactions must be obtained from your local tax services office. This Directorate will provide a technical interpretation concerning the provisions of the Act and Regulations but not with respect to specific factual or hypothetical transactions. We may, however, provide the following general comments concerning the provisions of the Act which are not binding on the Canada Customs and Revenue Agency (CCRA).

Subsection 248(5) of the Act states:

"For the purposes of this Act, other than paragraph 98(1)(a),

(a) where a person has disposed of or exchanged a particular property and acquired other property in substitution therefor and subsequently, by one or more further transactions, has effected one or more further substitutions, the property acquired by any such transaction shall be deemed to have been substituted for the particular property; ..."

The word "substitute" is defined in Black's Law Dictionary (Fifth Edition) as "to put in the place of another ... thing; to exchange." The word "exchange" is defined as " ... to swap, ... transaction in which one piece of property ... is given in return for another piece of property". The word "replace" is defined as " ... to supplant with substitute or equivalent."

Section 44 of the Act deals with replacement property. Paragraphs 9 to 21 of Interpretation Bulletin IT-259R3 describe what is considered to be replacement property. In order for the provisions of subsection 44(1) of the Act to apply, the taxpayer must dispose of, and acquire as a replacement, a capital property. Paragraph 44(5)(a.1) of the Act provides that a particular property is a replacement property if it is acquired for the same or similar use as the use to which the taxpayer or a person related to the taxpayer put the former property. Paragraph 15 of IT-259R3 states that, "to satisfy the requirement in paragraph 14(7)(a) and in paragraphs 13(4.1)(a) and 44(5)(a) ..., there must be some correlation or direct substitution, that is, a causal relationship between the disposition of a former property and the acquisition of a "replacement property" or properties."

In our view, when considering whether a property which is a replacement property is qualified farm property, the phrase "(vi) the property or property for which the property was substituted (in this subparagraph referred to as " the property")", should be read as "(vi) the [replacement] property or [the former business] property for which the [replacement] property was substituted (in this subparagraph referred to as " the property")". In our view, it is clear that replacement property and former business property would be property or property for which the property was substituted. Accordingly, either property could satisfy the requirements of the definition of qualified farm property in order for the replacement property to qualify.

However, when a property is not a replacement property for a former business property, it would be a question of fact as to whether the property and the property for which it was apparently bought in substitution, would be considered to be "property or property for which the property was substituted". This could only be considered on a rulings basis or by a Tax Services Office.

We trust our comments will be of assistance.

Yours truly,

Roberta Albert, CA
for Director
Business and Publications Division
Income Tax Rulings Directorate

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