27 January 2004 External T.I. 2003-0053261E5 - Replacement Property Rules

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 retirement home that is acquired to replace a motel, could be considered a replacement property for purposes of the replacement property rules.

Position: No.

Reasons: For a property to be considered a replacement property, among other things, it must be acquired for a use that is the same as or similar to the use to which the former property was put [paragraph 44(5)(a.1)]. It must also be acquired for use in a business that is the same as or similar to the business in which the former property was used [paragraph 44(5)(b)]. A retirement home is not a property that can be put to a use that is the same as or similar to the use of a motel, nor is the business of operating a retirement home the same as or similar to the business of operating a motel.

Randy Hewlett, B.Comm.

XXXXXXXXXX 613-957-8973
2003-005326
January 27, 2004

Dear XXXXXXXXXX:

Re: Replacement Property Rules

We are writing in response to your letter of November 4, 2003, wherein you requested our opinion on the application of the replacement property rules to a situation in which a taxpayer sells a motel and replaces it with a retirement home.

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 comments.

The replacement property rules in the Income Tax Act (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 property, the particular property must meet all 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-259R4, Exchange of Properties. For a property to be considered a replacement property, among other things, it must be acquired for a use that is the same as or similar to the use to which the former property was put (see paragraphs 16 and 17 of IT-259R4). It must also be acquired for use in a business that is the same as or similar to the business in which the former property was used (see paragraphs 18 to 21 of IT-259R4). In our opinion, a retirement home is not a property that can be put to a use that is the same as or similar to the use of a motel, nor is the business of operating a retirement home the same as or similar to the business of operating a motel.

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 Planning Branch