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 the replacement property rules in subsections 13(4.1) and 44(5) of the Income Tax Act apply to a replacement property located outside Canada. The former business property is also located outside Canada. The taxpayer is a Canadian resident.
Reasons: The definitions of "former business property" in subsection 248(1) and of replacement property in subsections 13(4.1) (depreciable property) and 44(5) (capital property).
XXXXXXXXXX G. Moore
December 4, 2006
Re: Replacement Property Outside Canada
This is in response to your letter of November 8, 2006, inquiring about whether the replacement property rules in the Income Tax Act apply to property outside Canada.
You describe a situation where a Canadian resident owns a business property (real property) in the United States. The Canadian resident intends to dispose of the property and replace it with another property (real property) in the United States. You are asking whether the replacement property rules in subsections 13(4) and 44(1) of the Income Tax Act (the "Act") would apply to a property outside Canada.
The situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advanced income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular 70-6R5, "Advanced Income Tax Rulings, dated May 17, 2002. This Information Circular and other CRA publications can be accessed on the internet at http://www.cra-arc.gc.ca. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office ("TSO") for their views. A list of TSOs is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following general comments, which may be of assistance.
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. The replacement property rules are discussed in detail in Interpretation Bulletin IT-259R4, Exchange of Properties.
Former business property is defined in subsection 248(1) and generally refers to capital property that is real property or an interest therein that is used primarily for the purpose of earning income from a business and excludes a rental property that generates gross revenue that is rent. The definition does not contain any restriction regarding the location of the former property; therefore, a former property located outside Canada is not precluded from qualifying as a former business property.
To be considered a replacement property, a particular property must meet all the requirements outlined in the definition in subsections 13(4.1) (for the rules in subsection 13(4) for depreciable property) and 44(5) (for the rules in section 44 for capital property) of the Act. Generally, a particular property is considered a replacement property if it meets the following conditions:
- it is acquired to replace the former property and there is a causal relationship between its acquisition and the disposition of the former property;
- the particular property must be acquired and used for a use that is the same or similar to the use to which the former property was put;
- if the former property was used for the purpose of gaining or producing income from a business, the particular property must be acquired for the purpose of gaining or producing from the same or a similar business;
- where the former property was a taxable Canadian property (defined in subsection 248(1)), the particular depreciable or capital property is also a taxable Canadian property; and
- where the former property was a taxable Canadian property that is not treaty-protected property (defined in subsection 248(1)), the particular depreciable or capital property is also a taxable Canadian property that is not treaty-protected property.
The definition of "replacement property" in subsections 13(4.1) and 44(5) does not preclude a particular property located outside Canada from qualifying as a replacement property for a former business property also located outside Canada.
As indicated in paragraph 15 of IT-259R4, with respect to replacement property, geographic location is generally not a determining factor. If a former business property is not located in Canada, a particular property not located in Canada may qualify as a replacement property if the other requirements of the definition of "replacement property" in subsections 13(4.1) (depreciable property) and 44(5) (capital property) of the Act are met.
We trust that these comments will be of assistance.
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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