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: (a) Is it possible for a property to be considered a replacement property if it is in a geographic location which is different from that of the former property? (b) Does the replacement property have to be located in Canada if the former property was located in Canada? (c) Can the replacement property rules apply when two or more properties replace a single property?
Position: (a) Yes; (b) Yes; (c) Yes.
Reasons: (a) Paragraph 15 IT-259R3; (b) Paragraph 44(5)(c); (c) Paragraph 28 IT-259R3.
XXXXXXXXXX Randy Hewlett, B.Comm.
613-957-8973
2003-001922
July 14, 2003
Dear XXXXXXXXXX:
Re: Replacement Property Rules
We are writing in response to your letter of May 9, 2003, wherein you requested our opinion on the application of the replacement property rules to a situation in which a taxpayer disposes of a former business property located in Canada, and replaces it with two or more properties used in the same business that may or may not be located in Canada.
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 on our understanding of the questions raised in your letter.
Question 1
Is it possible for each new property to be considered a "replacement property", as defined in subsection 44(5) of the Income Tax Act (the Act), if the new properties are in geographic locations which are different from that of the former business property?
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" (as defined in subsection 248(1) of the Act) is voluntarily disposed of, and a "replacement property" is acquired. To be considered a replacement for a former property, a particular property must meet all of the requirements outlined in subsection 44(5) of the Act. The definition of replacement property and the application of the replacement property rules are discussed in detail in Interpretation Bulletin IT-259R3, Exchanges of Properties.
As noted in paragraph 15 of the bulletin, the geographical location of the replacement property is not determinative when considering whether one property is a replacement for another. However, to satisfy the requirement in paragraph 44(5)(a) of the Act that "it is reasonable to conclude that the property was acquired by the taxpayer to replace the former property", there must be some correlation or direct substitution (i.e., a causal relationship) between the disposition of a former property and the acquisition of a replacement property.
Question 2
Does the newly acquired properties have to be located in Canada to be considered a replacement property for the former business property?
While geographic location is generally not a determining factor, pursuant to paragraph 44(5)(c) of the Act, where the former property was a "taxable Canadian property" of the taxpayer, to be considered a replacement property the particular property must also be a taxable Canadian property of the taxpayer. By virtue of the definition of taxable Canadian property in subsection 248(1) of the Act, if the property in question is real property, it must be located in Canada to be considered taxable Canadian property. Therefore, if a former business property was located in Canada, the particular property or properties must also be located in Canada to be considered "replacement property."
Question 3
Can the replacement property rules apply when two or more properties replace a single property?
As noted in the example described in paragraph 28 of the bulletin, it is possible for two or more properties to each be considered a replacement property for a former property. Where one property is replaced by two or more replacement properties, the cost of each replacement property can be aggregated in determining the amount of the capital gain or recapture from the former property. Of course, each property must meet all of the requirements in subsection 44(5) of the Act to be considered a replacement 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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