16 October 2002 Ministerial Correspondence 2002-0156414 - 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:

The CCRA's interpretation of replacement property to exclude property purchased under a business expansion.

Position:

The CCRA interpret these rules to exclude situations where property is purchased under a business expansion plan. This is not to say, however, that the purchase of a larger property to replace a smaller property is automatically excluded from beneficial treatment under these rules. The appearance of a business expansion on the surface may not be the case once an appreciation of all the facts and circumstances surrounding a particular situation are known.

Reasons:

Subsection 44(5) and prior opinions

October 16, 2002

XXXXXXXXXX

Dear XXXXXXXXXX:

Thank you for your letter of July 22, 2002, concerning the replacement property rules in the Income Tax Act. I was also copied on a letter addressed to you from the Honourable John Manley, Minister of Finance, dated August 14, 2002.

You expressed concern that farmers cannot use the replacement property rules to defer tax on the gain from a sale of existing farmland when they purchase new farmland under a business expansion. The Canada Customs and Revenue Agency (CCRA) sets out its interpretation of the rules in Interpretation Bulletin IT-259R3, Exchanges of Property. It states that there is a requirement in the rules indicating it must be reasonable to conclude that the new property is acquired as a replacement property for the former property. Therefore, there must be a correlation or causal relationship between the disposition of a former property and the acquisition of a replacement property.

Paragraph 15 of the bulletin states that these rules are not intended to encompass business expansions. However, this statement was made in the context of an example where a taxpayer was in the process of expanding a retail operation by opening and closing a number of locations. The CCRA views this type of business expansion as being excluded from beneficial treatment under these rules because there is no causal relationship between the acquisition of the new properties and the disposition of the existing properties.

This does not necessarily mean, however, that all business expansions are excluded from beneficial treatment under the rules. Such a determination can only be made with an appreciation of all the facts and circumstances surrounding a particular situation. In this regard, the CCRA will provide an advance income tax ruling on proposed transactions, or a tax services office will provide assistance to taxpayers in situations where the transactions are completed.

Mr. Randy Hewlett, an official of the Income Tax Rulings Directorate, discussed your letter with XXXXXXXXXX. The CCRA understands that farmers are often in a position where they want to sell existing farmland to purchase a larger farm. The reason they decide to sell is often based on the fact that the existing farmland is near an urban area and is very valuable compared to farmland in more remote areas. By selling the existing farmland, they can buy a larger farm in a remote area and increase the capacity of the farming operation. I assure you that these facts, in and by themselves, would not exclude the new farmland from being considered a replacement property for the existing farmland.

Thank you again for having taken the time to write. I trust that this explanation will be helpful.

						Sincerely,

						Elinor Caplan

c.c.: Minister's Office
Political Assistant

Randy Hewlett
(613) 957-8973
August 27, 2002
2002-015641