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 a particular property would be considered "used by the taxpayer ... for a use that is the same as or similar to the use to which the taxpayer ... put the former property", as required by the definition of replacement property in paragraph 44(5)(a.1) of the Act, if that use does not actually occur until after the expiration of the time period during which a taxpayer must acquire the replacement property.
Position: No.
Reasons: When subsections 44(5) and 13(4.1) are read in context with subsections 44(1) and 13(4), it means the taxpayer or a person related to the taxpayer must commence using the particular property for a use that is the same as or similar to the use to which the taxpayer or a person related to the taxpayer put the former property before the expiration of the time period during which the replacement property must be acquired. For an involuntary disposition the use must commence within two years from the end of the taxation year during which the disposition occurred, and for a voluntary disposition, it must commence within one year following the end of the taxation year during which the disposition occurred.
Randy Hewlett, B.Comm.
XXXXXXXXXX 613-957-8973
2003-001213
June 6, 2003
Dear XXXXXXXXXX:
Re: Replacement Property Rules
We are writing in response to your letter of April 4, 2003, wherein you requested our opinion on whether, for purposes of the replacement property rules, a particular property could be considered a "replacement property", as defined in subsection 44(5) of the Income Tax Act (the Act).
In your letter, you described a hypothetical situation as follows:
(a) Under the threat of expropriation, a taxpayer decides to sell to a local government the land and building where it carries on an active business (the "old property").
(b) The local government does not require the old property immediately, and allows the taxpayer to lease it for $1 per year until such time as it is required.
(c) Shortly after the old property is sold, the taxpayer acquires new land and a building (the "new property").
(d) The new property will be the location where the business operations are moved once the local government requires the old property.
(e) Until the time the taxpayer is required to move from the old property, it rents the new property to an arm's length party.
You inquired whether the new property would be considered "used by the taxpayer ... for a use that is the same as or similar to the use to which the taxpayer ... put the former property", as required by the definition of replacement property in paragraph 44(5)(a.1) of the Act. In your view, paragraph 44(5)(a.1) of the Act is a "purpose test" and does not require that the actual use of the particular property, which must be the same as or similar to the use to which the taxpayer put the former property, occur prior to the expiration of the time period specified in subsection 44(1), during which time the taxpayer must have acquired a replacement property.
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 property that is a "former business property" is voluntarily disposed of, and "replacement property" is acquired. For an involuntary disposition of a capital and depreciable property, paragraph 44(1)(c) and clause 13(4)(c)(ii)(A) of the Act, respectively, require that the taxpayer acquire a replacement property before the end of the second taxation year following the year of disposition of the former property. For a voluntary disposition of a capital and depreciable property, paragraph 44(1)(d) and clause 13(4)(c)(ii)(B) of the Act, respectively, require that the taxpayer acquire the replacement property before the end of the first taxation year following the year of disposition of the former property.
The requirements that a particular property must meet to be a replacement property are enumerated in subsections 44(5) and 13(4.1) of the Act for capital and depreciable property, respectively. Paragraphs 44(5)(a.1) and 13(4.1)(a.1) of the Act state that the particular property must be "acquired by the taxpayer and used by the taxpayer or a person related to the taxpayer for a use that is the same as or similar to the use to which the taxpayer or a person related to the taxpayer put the former property". It is therefore our view that, in addition to the particular time requirement that the taxpayer has to acquire a replacement property under subsections 44(1) and 13(4) of the Act, the taxpayer or a person related to the taxpayer must also commence using the particular property for a use that is the same as or similar to the use to which the taxpayer or a person related to the taxpayer put the former property, within such time periods. For an involuntary disposition, the use must commence within two years from the end of the taxation year during which the disposition of the former property occurs. For a voluntary disposition, it must commence within one year following the end of the taxation year during which the disposition of the former property occurs. Otherwise, it is our opinion that by the expiration of the time period during which the taxpayer must acquire a replacement property for the former property and so elect under subsection subsections 44(1) and 13(4) of the Act, the particular property will not be considered a replacement property.
It should also be noted that in a situation where the taxpayer or a person related to the taxpayer actually commences using the particular property for a use that is different from the use to which the taxpayer or a person related to the taxpayer put the former property, the property will not be considered a replacement property. For example, in a situation where a former property that was used in an active business is disposed of involuntarily, if the newly acquired property is actually used to earn rental income, it would not be considered a replacement property for the former property because it does not meet the requirement of being used in a same or similar business as the former 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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