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 an office building that is acquired as a rental property in replacement of an industrial warehouse (also a rental property) that was expropriated would be considered a "replacement property" as defined in subsections 13(4.1) and 44(5) of the Act?
Position: Question of fact whether the requirements of a "replacement property" as defined in subsections 13(4.1) and 44(5) are met and specifically whether the same or similar use test in paragraphs 13(4.1)(a.1) and 44(5)(a.1) is met.
Reasons: See analysis.
February 3, 2015
Re: Replacement Property Rules
This is in reply to your correspondence dated December 10, 2014, wherein you requested our views on whether, for purposes of the replacement property rules in subsections 44(1) and 13(4) of the Income Tax Act (the "Act"), a particular property could be considered as a replacement property. The facts in your letter are briefly summarized as follows:
- A corporate taxpayer ("Aco") owns land and building (the "Property") consisting of industrial warehouse units that are rented to arm's-length parties. The Property is included in Class 1 of Schedule II for capital cost allowance ("CCA") purposes.
- The Property is a rental property for the purposes of the replacement property rules.
- Aco has been served notice that the Property is to be expropriated (an involuntary disposition) and is expecting to receive compensation for the expropriation in the near future. Aco is contemplating acquiring an office building (the "New Property") as a replacement for the Property (i.e., a former property).
- The New Property will have the same general physical characteristics as the Property (i.e., comprised of land and building) and the office building will be included in the same CCA class as the Property.
- Aco will earn rental income (i.e., property income) from commercial leases with arm's-length tenants occupying the New Property.
Your specific concern is whether, for the purposes of paragraphs 44(5)(a.1) and 13(4.1)(a.1) of the Act, Aco will be considered to have acquired the New Property for a use that is the same or similar to that of the former property (i.e., the Property).
This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R6, Advance Income Tax Rulings and Technical Interpretations.
The same or similar use test set out in paragraphs 44(5)(a.1) and 13(4.1)(a.1) of the Act is explained in paragraphs 16 and 17 of IT-259R4, Exchanges of Property. Paragraph 16 discusses "same or similar use" in the context of an involuntary disposition of a former property where such property was not used for the purpose of gaining or producing income from a business (i.e., rental property or personal-use property). Paragraph 16 states:
16. Where a former property described in paragraph 1(a) was not used for the purpose of gaining or producing income from a business, the following comments apply in determining whether a replacement property is acquired for "the same or a similar use" as required by paragraphs 13(4.1)(a.1) and 44(5)(a.1) (as described in paragraph 14(b)(ii)).
(a) This requirement is met where the use of the property is the same or similar to the use to which the taxpayer or a person related to the taxpayer put the former property. Since the former property must have been used, land that has never been used by the taxpayer or a related person cannot qualify as a former property. Land (or any other capital property) that has been used for non-income earning purposes can qualify as a former property (for example, a personal-use cottage that is expropriated). Land that is acquired for resale cannot qualify because it is not a capital property.
(b) Although the property generally will bear the same physical description as the former property, for example, land replaced by land or a building by a building (but see paragraph 4), there may be cases where a different type of property provides the same use or function as the former property. For example, where shares of a cooperative corporation which carry rights to accommodation in an office building are acquired to replace an expropriated office building of the taxpayer, the shares could constitute a replacement property.
While it remains a question of fact as to whether the acquisition of a particular property is a replacement property for the disposition of a former property, the fact that a rental property, such as an industrial warehouse, is replaced with another rental property, such as an office building, would not, in and by itself, preclude the office building from being considered as a replacement property for the industrial warehouse for purposes of the replacement property rules.
We trust our comments will be of assistance.
Michael Cooke, C.P.A., C.A.
Business Income and Capital Transaction Section
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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