14 December 1990 External T.I. 9033515 F - 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.

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December 14, 1990

Dear Sirs:

Re:  Replacement property rules

This is in reply to your letter of November 7, 1990 concerning the application of the replacement property rules in sections 13 and 44 of the Income Tax Act (the "Act") in respect of an amalgamation.

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Our Comment

The fact situation which you set out is quite specific and it appears that it may relate to definite contemplated transactions. Assurance as to the consequences of contemplated transactions can only be given in response to a request for an advance income tax ruling. If you wish to obtain any binding commitment with respect to an actual case with facts similar to your example, an advance income tax ruling application should be submitted. If, on the other hand, your situation reflects factual historic occurrences, the determination of the availability of the deferral privileges of sections 13 and 44 would generally be carried out by personnel from our local District Taxation Office. We are therefore unable to comment specifically on the issues set out in your letter. However we offer the following general comments regarding the replacement property rules.

1.     Paragraph 10 of Interpretation Bulletin IT-491 indicates that a property will be a "former business property" of an amalgamated corporation if it is used, after the amalgamation by the amalgamated corporation primarily for the purpose of gaining or producing income from a business, and provided it otherwise satisfies the requirements of the definition of "former business property". This would be a question of fact. Subsection 248(1) of the Act does not specify a period of use or ownership for a capital property to be a former business property. This again is a question of fact.

2.     Replacement property of a taxpayer is defined in paragraph 44(5)(a) of the Act as property acquired "for the same or a similar use as the use to which be put the former property" and in paragraph 44(5)(b) as property acquired "for the purpose of gaining or producing income from that or a similar business. In our view, both the underscored parts of the two paragraphs refer to a purpose test. Neither of the two purpose tests would be satisfied if property were acquired for the purpose of being transferred after an amalgamation, to another related corporation.

3.     Finally, if it were a taxpayers intention at the outset to transfer a replacement property to a related corporation, following an amalgamation, and resume whatever arrangements had previously existed, it would appear that the transaction is part of a series of transactions, which series would result directly or indirectly in a tax benefit. Unless the transaction may reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to obtain the tax benefit, it is possible that section 245 ("GAAR") would apply.

We trust this will be of assistance.

Yours truly,

for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch