3 December 2001 Ministerial Correspondence 2001-0106684 - REPLACEMENT 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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: Whether Agency in applying replacement property rules too rigidly where farmers dispose of farmland and acquire larger property

Position: Question of fact. It is possible for larger farm property to qualify as replacement for former property where it is reasonable to conclude that the new property was acquired as a replacement for old property. Also, farmer can replace leasehold interest in land with land that is purchased.

Reasons: Consistent with definition of replacement property and prior opinions given.

December 3, 2001

The Honourable Lyle Vanclief, P.C., M.P.

Minister of Agriculture and Agri-Food
House of Commons
Ottawa, Ontario
K1A 0A6

Dear Colleague:

Thank you for your letter of October 5, 2001, further to correspondence you received from the Honourable Shirley McClellan, Deputy Premier and Minister of Agriculture, Food and Rural Development in the Government of Alberta, concerning the replacement property rules under the Income Tax Act.

I understand that you also wrote to our colleague, the Honourable Paul Martin, Minister of Finance, and that he outlined the tax policy underlying the replacement property rules.

The replacement property rules allow a taxpayer to defer recognition of capital gains and recaptured depreciation on the disposition of capital property, including depreciable property, if that property is replaced by a similar property within a specified time period. These rules apply to actual dispositions, such as sales or transfers, of real property and to involuntary dispositions, like expropriations and compensation for property destroyed, of capital property of any kind.

In order for a property to be considered a replacement property, it must be reasonable to conclude that the property was acquired to replace a former property. There is no single rule or guideline that can be applied to establish if this test is met. We would have to consider all of the facts in each case to determine if the replacement property rules would apply.

In order to help taxpayers understand the replacement property rules, the Canada Customs and Revenue Agency (CCRA) has published Interpretation Bulletin IT-259R3, Exchanges of Property, which provides a detailed description of how the rules are applied. In addition, the CCRA publishes the opinions and advance income tax rulings issued by its Income Tax Rulings Directorate, some of which concern the application of the replacement property rules in various situations.

In addition, the CCRA offers an advance income tax ruling service to provide taxpayers with a binding ruling on how existing income tax law would apply to a proposed transaction or series of transactions. Therefore, a taxpayer who is contemplating selling a property and re-investing the proceeds in a new property at a different location, can request an advance income tax ruling from the CCRA as to whether the replacement property rules would apply. In this regard, we have published Information Circular 70-6R4, Advance Income Tax Rulings, which describes the procedures to follow to request a ruling.

I trust that my comments have been of assistance to you in clarifying the way we administer the replacement property rules.

						Yours sincerely,

						Martin Cauchon

C.C. Minister's Office
Political Assistant

Wayne Antle
957-2102
November 2, 2001
Finalized 2001/11/16 - FC/kob