9 February 1983 Income Tax Severed Letter 5-4613 - [Replacement Property Rules, Section 44 of the Income Tax Act]

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.

P. K. Tang 995-1787

Dear Sirs:

Re: Replacement Property Rules Section 44 of the Income Tax Act

This is in reply to your letter of November 13, 1982 wherein you request our views concerning the application of the above noted section of the Income Tax Act (the Act).

Specifically you enquire if the replacement property rules as described under subsection 44(5) would apply if a taxpayer (e.g. a farmer) sold his personally held real property used in a particular business (such as farming property) and with the entire proceeds from the sale of this property purchased shares of a company which owned real property used for the same or similar use as the use to which the former property was put (such as farming).

You also refer us to a similar situation where a farmer uses the proceeds from the sale of his farming property to acquire shares of his newly incorporated corporation which would then use those funds along with borrowed money to acquire the replacement property which the corporation will use in the business of farming.

Subsection 44(5) provides that a particular capital property of a taxpayer will be considered to be a replacement property for purposes of section 44 if "it was acquired by the taxpayer for the same or similar use as the use of which he put the former property and where the former property was used by the taxpayer for the purpose of gaining or producing income from a business, the particular capital property was acquired for the purpose of gaining or producing income from that or a similar business".

As indicated in IT-259R , for purposes of subsection 44(5), the Department will consider the property acquired by a taxpayer as replacement property if it was acquired for the "same or similar use" as the use to which he put the former property. Where the former property was used for the purpose of gaining or producing income from a business, the Department will consider, the replacement property to be acquired for the "same or similar" use if it is also used for the purpose of gaining or producing income in the same or similar business. In the situation described, we are of the view that although there might be good reasons for the farmer to acquire shares of the corporation with the proceeds from the sale of his farm property, the shares acquired would not qualify as property "used for the purpose of gaining or producing income in the same or similar business (as his farm property)". It is our opinion that although the property acquired does not need to have the same use or function of the former property, it should normally bear the same physical description as the former property. Furthermore, as the shares acquired are capital property held by the farmer for investment purposes they can hardly be said to be property "used" by him in farming business.

We trust the above will be of assistance to you.

Yours truly,

for Director Corporate Rulings Division Legislation Branch