14 October 2008 External T.I. 2008-0277991E5 - 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: 1. Whether the replacement property rules can be claimed relevant to farmland that is replaced. 2. Whether a late filed election may be made. 3. Whether the replacement farmland is qualified farm property.

Position: 1. Completed transaction, not enough facts to opine. 2. A late filed election can be made to the extent that 44(1) applies. 3. Insufficient information.

Reasons: 1. Whether or not the tests and conditions are met relevant to the replacement property rules found in subsection 44(1) is a question of fact. This is a completed transaction and the determination is the responsibility of the taxpayer's TSO. 2. Subsection 220(3.2) provides, depending upon the circumstances, that the CRA may accept a late or amended election under subsection 44(1). 3. The determination whether a property is a Qualified Farm Property is relevant at the time of sale and the determination is necessarily made ex post facto. A determination cannot be made based upon the intentions of an individual.

                                                2008-027799
XXXXXXXXXX                                      James Atkinson CGA
(519) 457-4832
October 14, 2008

Dear XXXXXXXXXX :

Re: Replacement Property Rules

This is in response to your letter of fax of April 30, 2008, and a subsequent telephone conversation (Atkinson/XXXXXXXXXX ) on August 28, 2008, concerning the replacement property rules. We apologize for the delay in responding.

You described a situation where a taxpayer sold farmland totalling 160 acres in 2007. The taxpayer farmed the land but the circumstances were such that the activities were subject to section 31 (e.g., the restricted farm loss rules) of the Income Tax Act (the "Act"). Subsequent to the sale of the 160 acre parcel, the taxpayer acquired a parcel of farmland totalling 337 acres. You have advised that the taxpayer intends to farm the 337 acre parcel of farmland on a "full-time" basis.

You have requested an opinion as to whether the taxpayer may defer any capital gains arising on the disposition of the 160 acre parcel pursuant to the replacement property rules found in section 44 of the Act. Further, as the time has otherwise expired to properly elect under the replacement property rules, should the property qualify, you ask if a late filed election can be made. Finally, you have asked whether the 337 acre parcel might be considered "qualified farm property" ("QFP"), as defined in subsection 110.6(1), for purposes of claiming the capital gains deduction currently available under subsection 110.6(2) of the Act.

Our Comments:

The particular circumstances in your letter on which you have asked for our views appear to be a factual situation involving a specific taxpayer. As explained in Information Circular 70-6R5, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. For situations involving completed transactions, all relevant facts and documentation should be submitted to the appropriate tax services office for their views. However, we are prepared to offer the following general comments, which may be of assistance.

The conditions necessary to qualify for a deferral of the recognition of capital gains where a "former property" that is a "former business property" is voluntarily disposed of, and a "replacement property" is acquired, are discussed in IT-259R4 - Exchanges of Property, available on the CRA website at www.cra-arc.gc.ca.

To be considered a replacement property, the particular property must meet all the requirements outlined in the definition in subsection 44(5) of the Act. Former business property is generally defined as 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 is used principally for the purpose of earning gross revenue that is rent. A property is considered a replacement property, if it is acquired to replace the former property and there is a causal relationship between its acquisition and the disposition of the former property. In addition, the replacement 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 (the "same or similar use test"). Furthermore, if the former property was used for the purpose of gaining or producing income from a business, the replacement property must be acquired for the purpose of gaining or producing income from the same or a similar business (the "same or similar business test"). Finally, a former business property cannot be replaced with a property that is a rental property.

Whether or not the tests and conditions discussed above are met, permitting a deferral under subsection 44(1), are questions of fact. The information provided in your letter is insufficient for us to base an opinion on as to whether the tests and conditions above are satisfied. Since the sale of the old property and the acquisition of the new property occurred in 2007 and are therefore completed transactions, you may wish to contact the local tax services office for their views.

Concerning the election, as explained in paragraph 7 of IT-259R4, a taxpayer must elect to have the provisions of subsections 44(1), 13(4) and 14(6) of the Act apply. Where the disposition and replacement take place in the same year, a taxpayer's calculation (in the income tax return for that year) of the capital gain by virtue of subsection 44(1) will be considered to constitute an election. If the property is not replaced until a subsequent year, the election should take the form of a letter attached to the income tax return for the year the replacement property is acquired.

You have advised that no written election was made, and, that the gain resulting from the disposition of the 160 acre parcel was fully reported. If a deferral under subsection 44(1) is otherwise allowable because the tests and conditions discussed above are met, under the combined provisions of subsection 220(3.2) of the Act and Part VI of the Regulations, depending on the circumstances, the CRA may accept a late or amended election under subsection 44(1). For further particulars, see the current version of Information Circular 07-1, Taxpayer Relief Provisions available on the CRA website at www.cra-arc.gc.ca.

Concerning the capital gain exemption, the determination whether or not the 337 acre property will be considered QFP at disposition for the purposes of calculating any capital gains deduction is dependent upon fitting within the definition of QFP provided in subsection 110.6(1), and meeting certain other ownership and usage tests described in subsection 110.6(1.3) of the Act. The requirements for the capital gains deduction in respect of QFP are discussed in the two guides T4037, Capital Gains and T4003, Farming Income, which are publications available on the CRA website.

We trust that these comments will be of assistance.

Yours truly,

S. Parnanzone
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch