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: Whether new land and new building will be considered a replacement property for former business property.
Position: Yes.
Reasons: Properties will satisfy requirements in paragraph 44(5)(a) and 13(4.1)
XXXXXXXXXX 2006-018525
XXXXXXXXXX, 2006
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
XXXXXXXXXX (the "Taxpayer") BIN XXXXXXXXXX
We are writing in response your letter dated XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of the above-mentioned Taxpayer. We also acknowledge our various telephone conversations (XXXXXXXXXX).
We understand that to the best of your knowledge, and that of the taxpayer involved, none of the issues involved in the ruling request is:
I. in an earlier return of the Taxpayer or a related person;
II. being considered by a tax services office or a taxation centre in connection with a tax return already filed by the Taxpayer or a related person;
III. under objection by the Taxpayer or a related person;
IV. before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; and
V. the subject of a ruling previously issued by the Directorate.
Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended (the "Act"), and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.
Our understanding of the facts, the proposed transactions, and the purpose of the proposed transactions are as follows:
Facts
1. The Taxpayer is a taxable Canadian-controlled private corporation, XXXXXXXXXX% of the common shares of which are owned by an individual, XXXXXXXXXX. The Taxpayer was created by Articles of Amalgamation dated XXXXXXXXXX, under the laws of the Province of XXXXXXXXXX. The taxation year-end of the Taxpayer is XXXXXXXXXX.
2. The Taxpayer's main source of income is from renting XXXXXXXXXX and land to "associated" corporations (as defined in paragraph 256(1)(b) of the Act) carrying on XXXXXXXXXX services. The land XXXXXXXXXX (see 5 below) are used exclusively by corporations associated with the Taxpayer.
3. The Taxpayer and XXXXXXXXXX other associated companies that are headquartered in XXXXXXXXXX are Canadian-controlled private corporations, as defined in subsection 125(7) of the Act. Substantially all of the business activity of the associated corporations consists of rendering XXXXXXXXXX services to arm's length parties.
4. The associated corporations referred to in 2 and 3 above are related to the Taxpayer within the meaning of subsection 251(2) of the Act.
5. The Taxpayer owns XXXXXXXXXX (collectively referred to as the "Former Property"), which are used by the group of related corporations for their XXXXXXXXXX operations. The Former Property consists of land of XXXXXXXXXX acres ("Former Land"), a XXXXXXXXXX building ("Former Building") which belongs to capital cost allowance ("CCA") class 3 of Schedule II of the Income Tax Regulations (XXXXXXXXXX square feet), XXXXXXXXXX The total square footage of the Former Building is XXXXXXXXXX feet.
6. The Former Property has an estimated fair market value of approximately $XXXXXXXXXX, of which approximately $XXXXXXXXXX is allocable to the Former Building. XXXXXXXXXX.
7. XXXXXXXXXX The company will keep using the Former Property for the XXXXXXXXXX operations of the associated corporations until the replacement property is available for use for this purpose.
8. In XXXXXXXXXX, the company offered to purchase for $XXXXXXXXXX, XXXXXXXXXX acres of land ("Replacement Land") and a new XXXXXXXXXX ("Replacement Building") to be constructed by XXXXXXXXXX ("Vendor"). This property (collectively referred to as "Replacement Property") is located at XXXXXXXXXX, in the same vicinity as the Former Property XXXXXXXXXX. A deposit of $XXXXXXXXXX was paid with the offer to purchase. The completion date will be XXXXXXXXXX days following substantial completion of the Replacement Building which is expected to be on XXXXXXXXXX, subject to the Vendor's right to extend the completion date by XXXXXXXXXX days for two separate occasions. In order to protect the Taxpayer's $XXXXXXXXXX deposit while the Replacement Building is being constructed by the Vendor, a second charge on the property is given by the Vendor to the Taxpayer subject to a postponement of this charge to the Vendor's financial institution to finance the construction.
9. The Replacement Property consists of the Replacement Land (XXXXXXXXXX), the Replacement Building belonging to CCA class 1 (XXXXXXXXXX square feet), XXXXXXXXXX. The Replacement Building consists of an office and XXXXXXXXXX room (XXXXXXXXXX square feet), XXXXXXXXXX.
10. The allocation of the purchase price of $XXXXXXXXXX is $XXXXXXXXXX for the Replacement Land and $XXXXXXXXXX for the Replacement Building.
11. In addition, the other improvements to the Replacement Property include the construction of XXXXXXXXXX, CCA class 6, with an estimated cost of $XXXXXXXXXX and rough-in for the officers and XXXXXXXXXX room, CCA class 1, with an estimated cost of $XXXXXXXXXX.
12. The Replacement Property will be used exclusively for XXXXXXXXXX operations of the associated corporations of the Taxpayer.
Proposed Transactions
13. The Taxpayer will acquire the Replacement Property described in 8 above from the Vendor.
14. The Taxpayer will list for sale the Former Property described in 5 above. It is expected that the sale of the Former Property will be completed by XXXXXXXXXX.
15. The Replacement Property acquired from the Vendor will be operated by the Taxpayer as XXXXXXXXXX and used by the associated group of corporations before XXXXXXXXXX.
16. The Taxpayer will file an election under subsection 44(1) of the Act for purposes of determining the capital gain on the disposition of the Former Property. The election will be filed in the Taxpayer's return for the year ending XXXXXXXXXX.
17. The Taxpayer will elect under subsection 13(4) of the Act for purposes of determining the proceeds of disposition of the Former Building. The election filed by the Taxpayer under subsection 44(1), as noted in 16 above, will be deemed to be an election under subsection 13(4) pursuant to paragraph 44(4)(a) of the Act.
Purpose of the Proposed Transactions
The purpose of the proposed transactions is to permit the Taxpayer to update and improve its XXXXXXXXXX facilities that are rented to associated corporations conducting XXXXXXXXXX operations.
Rulings Given
Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions, and purpose of the proposed transactions, and the proposed transactions are completed as described above, our rulings are as follows:
A. The Replacement Land, will constitute replacement property for the Former Land, as described in 5 above, within the meaning of subsection 44(5) of the Act.
B. The Replacement Building, as noted in 8 above, will constitute replacement property for the Former Building, as described in 5 above, within the meaning of subsections 44(5) and 13(4.1) of the Act.
C. The Taxpayer's capital gain on the disposition of the Former Land and the Former Building will be determined in accordance with paragraph 44(1)(e) of the Act. The cost of the Replacement Land and the Replacement Building will be determined in accordance with paragraph 44(1)(f) of the Act.
D. The amount otherwise determined for F in the definition of "undepreciated capital cost" in subsection 13(21) of the Act in respect of the disposition of the Taxpayer's Former Building will be reduced in accordance with paragraph 13(4)(c) of the Act.
E. For the purpose of calculating the "undepreciated capital cost" (as defined in subsection 13(21) of the Act) of the Replacement Building, the capital cost will be determined pursuant to paragraphs 44(1)(f) and 13(4)(d) of the Act.
Caveat
Nothing in this ruling should be construed as implying that the Canada Revenue Agency has agreed to or reviewed the tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above.
The rulings provided herein are subject to the limitations and qualifications set out in Information Circular 70-6R5 dated December 30, 1996, and are binding on the Canada Revenue Agency provided that the proposed transactions are completed before XXXXXXXXXX.
Yours truly,
XXXXXXXXXX
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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