2002 Ruling 2002-0127033 - EXCHANGE OF 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 two brothers who have joint-ownership of several pieces of land, and propose to exchange their interest with each other so that each has an undivided interest in certain parcels, can defer the resulting capital gains using subsection 44(1) of the Act.

Position: Replacement property election can be made. However, land would be depreciable property in this case because each parcel is a timber limit. Accordingly, paragraph 13(7)(e) would be relevant in determining the capital cost for CCA purposes.

Reasons: The replacement property rules can apply to non-arm's length sales. Even though no CCA has been claimed on the timber limits, paragraph 13(7)(e) would still be applicable in determining the cost of the property for CCA purposes. This deemed cost would be used in the 44(1)(f) formula, but only for CCA purposes. The preamble to subsection 13(7) provides that the subsection only applies for CCA purposes.

XXXXXXXXXX 2002-012703

XXXXXXXXXX, 2002

Dear XXXXXXXXXX:

Re: Advance Income Tax Rulings
XXXXXXXXXX
XXXXXXXXXX

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

We understand that, to the best of your knowledge and that of the taxpayers 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 centre 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 ("Mr. A") is currently XXXXXXXXXX years old. He was born on XXXXXXXXXX.

2. XXXXXXXXXX ("Mr. B") is currently XXXXXXXXXX years old. He was born on XXXXXXXXXX.

3. Mr. A and Mr. B are brothers.

4. Mr. A and Mr. B were both born and raised in XXXXXXXXXX.

5. The XXXXXXXXXX families have lived, worked and owned property in this area since XXXXXXXXXX.

6. Mr. A and Mr. B have always been involved in the logging and sawmill business. Since XXXXXXXXXX, Mr. A and Mr. B carried on business together as a partnership. During this time Mr. A and Mr. B acquired a number of timber properties. Most of these properties were registered in both of their names jointly.

7. These jointly-owned properties were timber properties. The properties were acquired by them to provide a long-term source of timber for their business activities.

8. In XXXXXXXXXX, Mr. A and Mr. B incorporated XXXXXXXXXX (the "Company"), which carried on a sawmill and logging business.

9. There are XXXXXXXXXX Common Shares of the Company issued. Since XXXXXXXXXX, Mr. B and his wife have owned XXXXXXXXXX Common Shares and Mr. A and his wife have owned XXXXXXXXXX Common Shares. On the death of Mr. A's wife in XXXXXXXXXX, all XXXXXXXXXX Common Shares were registered in Mr. A's name.

10. For income tax purposes, Mr. A and Mr. B are both related to the Company.

11. The following seven parcels of timber lands, hereinafter referred to as the "jointly-owned properties", are jointly-owned by Mr. A and Mr. B, and are operated and managed for their timber resources:

Reference Name
Area (acres)
Year Acquired

1.

XXXXXXXXX ("Parcel A")
XXXXXXXX
XXXXX

2.

XXXXXXXXX ("Parcel B")
XXXXXXXX
XXXXX

3.

XXXXXXXXX ("Parcel C")
XXXXXXXX
XXXXX

4.

XXXXXXXXX ("Parcel D")
XXXXXXXX
XXXXX

5.

XXXXXXXXX ("Parcel E")
XXXXXXXX
XXXXX

6.

XXXXXXXXX ("Parcel F")
XXXXXXXX
XXXXX

7.

XXXXXXXXX ("Parcel G")
XXXXXXXX
XXXXX

XXXXXXXX

12. Each of Mr. A and Mr. B has an undivided 50% interest in each of the jointly-owned properties.

13. Mr. A and Mr. B have owned the jointly-owned properties for over XXXXXXXXXX years.

14. Each of the properties is registered in the names of both Mr. A and Mr. B, with the exception of Parcel B which was registered in Mr. B's name alone in error. However, Parcel B is also jointly owned by both Mr. A and Mr. B. Parcel G was previously registered in the names of Mr. A's wife and Mr. B until the death of Mr. A's wife in XXXXXXXXXX. It is now registered in both Mr. A's and Mr. B's names.

15. The jointly-owned properties are managed forestland and have been used, and will continue to be used, to provide a supply of logs for the Company.

16. The jointly-owned properties are managed and selectively harvested as species mature and market conditions are favourable. Harvesting also occurs for forest management, fire control, road access and insect and pest control purposes.

17. The jointly-owned properties are all within close proximity to XXXXXXXXXX and have road access.

18. Each of the jointly-owned properties is considered to be a capital property by Mr. A and Mr. B. Also, each such property is a timber limit and, therefore, is depreciable property of a separate prescribed class pursuant to subsection 1101(3) of the Income Tax Regulations. However, no deduction under paragraph 20(1)(a) of the Act has ever been claimed in respect of the jointly-owned properties.

19. The principal value of the jointly-owned properties is derived from their timber value, which fluctuates from time to time as the variety of species, maturity and market prices change.

20. Both Mr. A and Mr. B are experiencing health problems, and both Mr. A and Mr. B wish to retire and have their children more involved in the business.

21. Mr. A has XXXXXXXXXX children and XXXXXXXXXX grandchildren.

22. Mr. B and his wife have XXXXXXXXXX children and XXXXXXXXXX grandchildren.

23. In order to facilitate succession of the business and to enable Mr. A and Mr. B to establish their own separate estate plans, Mr. A and Mr. B wish to exchange their interests in the jointly-owned properties so that they are separately owned.

24. After the properties become separately owned, Mr. A and Mr. B will use the properties in the same manner as they have been previously used.

Proposed Transactions

25. Mr. A and Mr. B have entered into an agreement in principle to exchange their interests in the jointly-owned properties.

26. Mr. A and Mr. B have agreed that due to the terrain, types of species and maturity of the timber on the properties, that three parcels (Parcel A, Parcel B and Parcel C) are equal in value to four parcels (Parcel D, Parcel E, Parcel F and Parcel G) even though the four parcels are larger.

27. As part of the agreement, Mr. B will transfer his undivided 50% interest in the following parcels to Mr. A:

Reference Name
Area (acres)
Parcel D
XXXXXXXXXX
Parcel E
XXXXXXXXXX
Parcel F
XXXXXXXXXX
Parcel G
XXXXXXXXXX
TOTALS
XXXXXXXXXX

28. As part of the agreement, Mr. A will transfer his undivided 50% interest in the following parcels to Mr. B:

Reference Name
Area (acres)
Parcel A
XXXXXXXXXX
Parcel B
XXXXXXXXXX
Parcel C
XXXXXXXXXX
TOTALS
XXXXXXXXXX

29. Mr. A and Mr. B will each file an election under subsection 44(1) of the Act for the purposes of determining the capital gain on the disposition of their interests in each jointly-owned property. Pursuant to subsection 44(4) of the Act, an election will be deemed to have been filed under subsection 13(4) of the Act.

Purpose of the Proposed Transactions

30. Mr. A and Mr. B wish to have separately owned properties so that they can plan for the orderly transition of their properties to their spouses, children and grandchildren.

31. Mr. A and Mr. B wish to minimize disagreements between the children and grandchildren of their respective families. They feel that while the two of them have been able to co-own the properties for many years, it may be much more difficult for their respective children and grandchildren to co-own the properties.

32. Mr. A and Mr. B would like to make a fair division of the properties while they are still alive.

33. Mr. A and Mr. B would like to elect to defer recognition of the capital gains on their respective interest in the jointly-owned properties.

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 25 to 29 above, our rulings are as follows:

A. The 50% undivided interest held by Mr. A and Mr. B in each of the jointly-owned properties is a former business property as defined in subsection 248(1) of the Act.

B. The property received by Mr. A from Mr. B as consideration for the disposition of the interest held by Mr. A in each jointly-owned property will be considered replacement property within the meaning of subsections 44(5) and 13(4.1) of the Act.

C. The property received by Mr. B from Mr. A as consideration for the disposition of the interest held by Mr. B in each jointly-owned property will be considered replacement property within the meaning of subsections 44(5) and 13(4.1) of the Act.

D. The capital gains on the dispositions of each of Mr. A's and Mr. B's interests in the jointly-owned properties will be computed in accordance with paragraph 44(1)(e) of the Act.

E. For the purpose of calculating the undepreciated capital cost (as defined in subsection 13(21) of the Act) of each property acquired by Mr. A from Mr. B, and each property acquired by Mr. B from Mr. A, the capital cost will be determined pursuant to paragraphs 13(7)(e) and 44(1)(f) of the Act.

F. For the purposes of computing the adjusted cost base of each property acquired by Mr. A from Mr. B, and each property acquired by Mr. B from Mr. A, the cost of each property will be determined in accordance with paragraph 44(1)(f) of the Act.

We have not reviewed or confirmed the values for the adjusted cost base, proceeds of disposition, capital cost, or undepreciated capital cost of the properties. Since the jointly-owned properties were acquired prior to 1972, paragraph 20(1)(a) of the Income Tax Application Rules, 1971 may be applicable in determining the proceeds of disposition of each interest held by Mr. A and Mr. B in the jointly-owned properties.

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