2001 Ruling 2001-0089773 - BUILDING AS REPLACEMENT FOR LAND

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 44(6) could be used to reallocate proceeds where land and building are sold, and new replacement building is constructed on land already owned by taxpayer.

Position: Subsection 44(6) can be used because there is nothing in the wording of 44(5)the provision requiring that a land and building be acquired to replace the former property.

Reasons: Wording of subsection 44(6); consistent with B5964.44(6)

XXXXXXXXXX 2001-008977

XXXXXXXXXX, 2001

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX

This is in reply to your letter dated XXXXXXXXXX requesting an advance income tax ruling on behalf of the above-noted taxpayer.

We understand that, to the best of your knowledge and that of the taxpayer 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 taxation center in connection with a previously filed tax return of 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 are as defined in the Act unless otherwise indicated.

Our understanding of the facts, proposed transactions and the purpose of the proposed transactions is as follows:

Facts

1. XXXXXXXXXX (the "Taxpayer") is a corporation incorporated under the laws of XXXXXXXXXX. The Taxpayer is a Canadian-controlled private corporation within the meaning of subsection 125(7) of the Act and is wholly owned by XXXXXXXXXX. The Taxpayer's address is XXXXXXXXXX. The Taxpayer has not yet filed its first tax return. It is in the process of applying for an account number. The Taxpayer's taxation year-end is XXXXXXXXXX.

2. The Taxpayer owns all the issued and outstanding shares of XXXXXXXXXX ("Opco"). Accordingly, pursuant to subsection 251(2) of the Act, the Taxpayer is related to Opco. Opco is a corporation incorporated under the laws of XXXXXXXXXX and is a Canadian-controlled private corporation within the meaning of subsection 125(7). Its tax return is filed with the XXXXXXXXXX Taxation Centre and its account number is XXXXXXXXXX.

3. Opco is in the business of XXXXXXXXXX (the "Business Operations"). XXXXXXXXXX. The Business Operations constitute a business the gross revenue of which is treated as active business income. Substantially all of the business activity of Opco consists of the Business Operations.

4. The Taxpayer owns two contiguous parcels (the "Parcels") of land, both of which are now used in the Business Operations of the XXXXXXXXXX. Although the Parcels currently form one single block of land, as noted in paragraph 9 below, the Taxpayer is in the process of applying to have the Parcels severed.

5. One parcel of land (the "Front Parcel") is approximately XXXXXXXXXX The Front Parcel is used for customer parking, XXXXXXXXXX and contains the building (the "Former Building") used in the Business Operations. The Front Parcel is necessary for the use of the Former Building and cannot be severed from it. As a result, the Front Parcel and the Former Building (together referred to herein as the "Former Property") can only be sold as a single unit.

6. The Former Building belongs to class 3 of Schedule II of the Regulations and is used solely in the Business Operations. XXXXXXXXXX.

7. The second parcel (the "Back Parcel") is approximately XXXXXXXXXX The Back Parcel is used for employee parking and XXXXXXXXXX.

8. The Parcels have an aggregate adjusted cost base ("ACB") to the Taxpayer of $XXXXXXXXXX per acre. Accordingly, the ACB of the Front Parcel to the Taxpayer is $XXXXXXXXXX. The Former Building has an ACB of $XXXXXXXXXX. Both the Parcels and the Former Building were acquired on XXXXXXXXXX in a non-arm's length purchase from XXXXXXXXXX deceased father's estate. Prior to this purchase, the Parcels and the Former Building were used in the Business Operations.

9. In XXXXXXXXXX , the Taxpayer conditionally offered to sell the Former Property to XXXXXXXXXX. The sale is conditional on the Taxpayer obtaining a severance of the Front Parcel from the Back Parcel, XXXXXXXXXX and the receipt of a favourable advance income tax ruling (the "Favourable Ruling") with respect to the application of the replacement property rules in subsections 44(1) and 13(4) of the Act. The agreed purchase price is $XXXXXXXXXX and is to be allocated as follows:

Front Parcel		$XXXXXXXXXX
Former Building		$XXXXXXXXXX
	  $XXXXXXXXXX 

10. If the Former Property is sold pursuant to the agreement referred to in paragraph 9 above, the Taxpayer will construct a class 1 building, (the "Replacement Building") on the Back Parcel to replace the Former Building. The Replacement Building will be approximately XXXXXXXXXX square feet and will house XXXXXXXXXX operations currently being undertaken in the Former Building. Although the footprint of the Replacement Building will be approximately the same size as that of the Former Building, it will be XXXXXXXXXX and larger in square footage. XXXXXXXXXX The cost of construction is estimated to be at least $XXXXXXXXXX.

Proposed Transactions

11. The Taxpayer will sell the Former Property. It is expected that the sale will be completed as soon as possible after the conditions described in paragraph 9 are met.

12. The Taxpayer will undertake the activities described in paragraph 10 above and will erect the Replacement Building. The Replacement Building will be built to replace the Former Building and will also replace some portion of the customer parking and XXXXXXXXXX currently undertaken on the Front Parcel.

13. The Taxpayer will file an election under subsection 44(1) of the Act for purposes of determining the capital gain on the disposition of the Front Parcel and the Former Building. The election will be filed by the Taxpayer before the end of the taxation year following the year in which the proceeds of disposition in respect of the Former Property become receivable. In addition, the Taxpayer will file an election under subsection 44(6) and will reallocate $XXXXXXXXXX (the excess of the proceeds of disposition of the Front Parcel over the ACB of the Front Parcel) from the proceeds of disposition of the Front Parcel to the proceeds of disposition of the Former Building.

14. The Taxpayer will elect under subsection 13(4) of the Act for the purposes of determining the proceeds of disposition of the Former Building. The election filed by the Taxpayer under section 44, as noted in paragraph 13 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

15. The purpose of the proposed transactions is to permit the Taxpayer's wholly owned subsidiary, Opco, to relocate its Business Operations to the Back Parcel without adverse tax consequences.

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 provided further that the proposed transactions are carried out as described in paragraphs 11 to 14 above, our rulings are as follows:

A. The Replacement Building constructed on the Back Parcel will be considered a replacement property for the former property (consisting of the Former Building and Front Parcel) within the meaning of subsections 44(5) and 13(4.1) of the Act.

B. Such portion of the amount by which the proceeds of disposition of the Front Parcel exceed the ACB of the Front Parcel to the Taxpayer as is elected by the Taxpayer in its return of income under Part I of the Act for the year in which the Replacement Building is acquired, will be deemed by subsection 44(6) of the Act to be proceeds of disposition of the Former Building and not proceeds of disposition of the Front Parcel.

C. The taxpayer's capital gain on the disposition of the Front Parcel and the Former Building will be computed in accordance with paragraph 44(1)(e) 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.

We have not confirmed the values for the adjusted cost base, proceeds of disposition, capital cost, or undepreciated capital cost of the assets.

The rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R4 dated January 29, 2001, and are binding on the Canada Customs and Revenue Agency provided the transactions are completed by XXXXXXXXXX.

The rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided herein.

Yours truly

XXXXXXXXXX
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch