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: If a corporation that owns several apartment buildings is considered an "active business" and the rental income derived from the apartment buildings is considered "income of the corporation for the year from an active business", if one of these properties is disposed of, can it be considered a former business property for purposes of the replacement property rules?
Position: No
Reasons: As noted in Interpretation Bulletin IT-491, Former Business Property, "even though a property is used to earn qualified business income, it would be disqualified as a former business property if it was used in the taxation year in which it was disposed of principally for the purpose of producing rent". Further, as noted in Question 47 of the 1988 Canadian Tax Foundation Conference round table discussion, the definition of former business property "is very specific and is not connected to or affected by the provisions and definitions concerning active business and qualified small business corporation shares."
Randy Hewlett, B.Comm.
XXXXXXXXXX 613-957-8973
2003-001180
May 22, 2003
Dear XXXXXXXXXX:
Re: Replacement Property Rules: Definition of "Former Business Property"
We are writing in response to your letter of March 29, 2003, wherein you requested our opinion on whether a particular rental property could be considered a former business property, as defined in subsection 248(1) of the Income Tax Act (the Act), for purposes of the replacement property rules.
In your letter, you described a situation in which a corporation that owns several apartment buildings is considered to be carrying on an "active business", as defined in subsection 248(1) of the Act. Further, the rental income derived from the apartment buildings is considered "income of the corporation for the year from an active business", as defined in subsection 125(7) of the Act. In your view, if one of these properties is disposed of, it should be considered a former business property for purposes of the replacement property rules in sections 13 and 44 of the Act because the rental income earned is considered active business income of the corporation.
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we offer the following general comments.
As noted in Interpretation Bulletin IT-259R3, Exchanges of Properties, the replacement property rules in the Act permit a taxpayer to elect to defer the recognition of income or capital gains where a "former property" is involuntarily disposed of or a "former business property" is voluntarily disposed of, and "replacement property" is acquired. For purposes of these rules, subsection 248(1) of the Act defines a former business property as "a capital property of the taxpayer that was used by the taxpayer or a person related to the taxpayer primarily for the purpose of gaining or producing income from a business ... but does not include ... a rental property of the taxpayer". Further, a rental property "means real property owned by the taxpayer... and used by the taxpayer in the taxation year ... principally for the purpose of gaining or producing gross revenue that is rent (other than property leased by the taxpayer to a person related to the taxpayer and used by that related person principally for any other purpose)..."
As noted in paragraph 3 of Interpretation Bulletin IT-491, Former Business Property, which discusses the definition of former business property, "even though a property is used to earn qualified business income, it would be disqualified as a former business property if it was used in the taxation year in which it was disposed of principally for the purpose of producing rent". Further, as noted in Question 47 of the 1988 Canadian Tax Foundation Conference round table discussion, the definition of former business property "is very specific and is not connected to or affected by the provisions and definitions concerning active business and qualified small business corporation shares". On this basis, it is our view that, notwithstanding the fact that a property owned by a corporation earns rental income that may be considered active business income, it is an excluded rental property for purposes of the definition of former business property.
We trust our comments will be of assistance to you.
Yours truly,
John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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