28 May 2004 External T.I. 2004-0066251E5 - 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.

Principal Issues: (a) Whether a particular property acquired by the taxpayer would be a replacement property if the disposition of the former business property occurred three to five years after the acquisition of the particular property, (b) Whether a particular property acquired by the taxpayer would be a replacement property if it was acquired from a related party, and (c) Whether a particular property acquired by the taxpayer would be a replacement property if it was acquired by virtue of a subsection 85(1) rollover.

Position: Question of fact.

Reasons: Paragraphs 13(4.1)(a) and 44(5)(a) of the Act require that it must be reasonable to conclude that the property was acquired by the taxpayer to replace the former property. To satisfy this requirement, there must be some correlation or direct substitution, that is, a causal relationship between the disposition of a former property and the acquisition of the new property or properties. On this basis, it would be difficult to conclude that a property acquired several years prior to the disposition of the former property is in fact a replacement property. Therefore, in (a) the particular property will not likely be considered a replacement property. With respect to (b), a taxpayer is not precluded from benefiting from the application of the replacement property rules because the property acquired as a replacement was acquired from a non-arm's length person, but other provisions of the Act, such as section 69, must be considered. With respect to (c) we do not have a general position on the application of the replacement property rules where the property acquired as a replacement was acquired by way of a subsection 85(1) rollover; a determination of whether the replacement property rules apply in such a situation can only be made after a complete review of all the facts and documentation surrounding the particular situation.

XXXXXXXXXX Randy Hewlett, B. Comm.

2004-006625
May 28, 2004

Dear XXXXXXXXXX:

Re: Replacement Property Rules

We are writing in response to your letter of March 4, 2004, wherein you requested our opinion on three different scenarios as it pertains to the definition of "replacement property" under subsections 13(4.1) and 44(5) of the Income Tax Act (the "Act").

In the first scenario, you inquired whether a particular property acquired by the taxpayer would be a "replacement property" if the disposition of the "former business property" occurred three to five years after the acquisition of the particular property. In the second scenario, you inquired whether a particular property acquired by the taxpayer would be a replacement property if it was acquired from a related party. In the third scenario, you inquired whether a particular property acquired by the taxpayer would be considered a replacement property if it was acquired by virtue of a subsection 85(1) rollover.

Our Comments

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.

The replacement property rules in sections 13 and 44 of 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 a "replacement property" is acquired. To be considered a replacement property, the particular property must meet all the requirements outlined in subsection 13(4.1) or 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, Exchanges of Property. The definition of former business property is in subsection 248(1) of the Act, and further explained in detail in IT-491, Former Business Property.

As noted in paragraph 2 of IT-259R4, there is no requirement in the Act that the replacement property be acquired after the former property is disposed of. However, the particular property must nevertheless qualify as a replacement property. The first requirement in paragraphs 13(4.1)(a) and 44(5)(a) of the Act, for example, is that it be reasonable to conclude that the particular property was acquired by the taxpayer to replace the former property. As noted in paragraph 15 of IT-259R4, to satisfy this requirement, "there must be some correlation or direct substitution, that is, a causal relationship between the disposition of a former property and the acquisition of the new property or properties." On this basis, we are of the view that it would be difficult to conclude that a property acquired several years prior to the disposition of the former property is in fact a replacement property. Therefore, in terms of the first scenario described in your letter, the particular property will not likely be considered a replacement property.

With respect to the second scenario described in your letter, it is our view that a taxpayer is not precluded from benefiting from the application of the replacement property rules because the property acquired as a replacement was acquired from a non-arm's length person, but other provisions of the Act, such as section 69, must be considered. In terms of the third scenario, we do not have a general position on the application of the replacement property rules where the property acquired as a replacement was acquired by way of a subsection 85(1) rollover. In our view, a determination of whether the replacement property rules apply in such a situation can only be made after a complete review of all the facts and documentation surrounding the particular situation. In this regard, we would be pleased to consider your request in the context of an advance income tax ruling.

We trust our comments are of assistance.

Yours truly,

Randy Hewlett, B.Comm.

for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch