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: Application of the replacement property rules to a situation in which a larger farm property is acquired to replace a smaller property.
Position: Property can still be considered a replacement property under subsection 44(5) of the Act.
Reasons: The fact that a property is purchased under a business expansion will not, in and by itself, mean that it cannot be considered a replacement property.
July 8, 2003
XXXXXXXXXX HEADQUARTERS
Verification and Enforcement Division Randy Hewlett, B.Comm.
XXXXXXXXXX Tax Services Office 613-957-8973
2003-002415
Replacement Property Rules - XXXXXXXXXX (the "taxpayer")
We are writing in response to your letter of June 10, 2002, regarding the application of the replacement property rules to an actual situation that you have under review.
Our understanding of the facts is as follows:
? In her XXXXXXXXXX taxation year, the taxpayer voluntarily disposed of a XXXXXXXXXX interest in a farm (the "old farm") that had a total of XXXXXXXXXX acres of land (the "old farmland") and included a XXXXXXXXXX (the "old XXXXXXXXXX"). The taxpayer's XXXXXXXXXX interest represented a total of XXXXXXXXXX acres of the old farmland.
? In her XXXXXXXXXX taxation year, the taxpayer purchased from her spouse his XXXXXXXXXX% interest in another farm (the "new farm") that had a total of XXXXXXXXXX acres of land (the "new farmland") and included a XXXXXXXXXX (the "new XXXXXXXXXX"), a XXXXXXXXXX (the "new XXXXXXXXXX"), and a residence (the "residence"). The taxpayer's XXXXXXXXXX% interest represented a total of XXXXXXXXXX acres of the new farmland.
? Although the old farmland and new farmland are different in size, the tillable acres on both are approximately the same.
? The taxpayer's XXXXXXXXXX, through a lifetime occupancy agreement, occupies the residence. Upon the death of the XXXXXXXXXX, the occupancy agreement will be transferred to the taxpayer's XXXXXXXXXX.
Your main questions are:
1. Do the replacement property rules apply such that the farmland and buildings are considered one property, or do the rules apply separately to each property?
2. Is it possible for the new farmland to meet the definition of "replacement property" in subsection 44(5) of the Income Tax Act (the Act), given the fact that it is much larger than the old farmland?
3. Can the new XXXXXXXXXX, new XXXXXXXXXX and residence all be considered replacement properties for the old XXXXXXXXXX?
We outline below our comments on each of these questions.
Question 1
As noted in Interpretation Bulletin, IT-259R3, Exchanges of Property, the replacement property rules in the Act apply on a property-by-property basis. Therefore, in your situation it must be determined whether the new farmland is a replacement property for the old farmland, and whether the buildings on the new farm are replacement properties for the old XXXXXXXXXX. Since the rules apply separately in respect of each property disposed of, the respective values of the farmland and buildings must be known. Consequently, before determining the tax implications of the disposition of the old farm and the acquisition of the new farm (including the application of the replacement property rules), the total proceeds of disposition of the old farm must be allocated between the old farmland and old XXXXXXXXXX, and the acquisition cost of the new farm must be allocated between the new farmland and each of the buildings located thereon.
You should note, however, that under the replacement property rules, the taxpayer may elect under subsection 44(6) of the Act to reallocate the proceeds of disposition between the old farmland and the old XXXXXXXXXX. This election would be beneficial to the taxpayer if the value of the old farmland is high compared to the value of the old XXXXXXXXXX (or vice versa) and an allocation of the proceeds of disposition between the two properties results in greater deferral of the capital gain or recapture otherwise calculated.
Question 2
Although paragraph 15 of IT-259R3states that the replacement property rules are not intended to encompass business expansions, the fact that a property is purchased under a business expansion does not, in and by itself, mean that it cannot be considered a replacement property (See Income Tax Technical News No. 25, which contains a summary of this issue discussed at the 2002 annual conference of the Canadian Tax Foundation). Therefore, on the basis of the facts noted above and on the assumption that the new farmland will not be used for any purpose other than farming, it is our view that it will qualify as a replacement property for the old farmland.
Question 3
As noted in paragraph 28 of IT-259R3, it is possible for one property to be replaced by two or more replacement properties for purposes of these rules. In our view, the new XXXXXXXXXX and new XXXXXXXXXX may qualify as a replacement property for the old XXXXXXXXXX, provided they are both put to the same use as the old XXXXXXXXXX. We do not feel, however, that the residence is a replacement property since it is not used in the farming business.
If you need assistance in determining the value of the respective properties for purposes of applying the replacement property rules in your situation, you should contact the headquarters Technical Application and Valuations Division (TAVD), Compliance Programs Branch. We have discussed your inquiry with Jennifer Ryan, a Section Manager in TAVD, and she has agreed to provide you with any further assistance you may require in this regard.
We trust our comments are of assistance. For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Customs and Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the electronic library version, or they may request a severed copy using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.
John Oulton, CA
Manager
Individual and Business Section
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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