31 March 1994 External T.I. 9331515 - REPLACEMENT PROPERTY

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

			933151

XXXXXXXXXX A. M. Brake

Attention: XXXXXXXXXX

March 31, 1994

Dear Sirs:

Re: Section 44 - Replacement Property Rules

This is in reply to your letter of October 25, 1993, wherein you outlined a hypothetical fact situation regarding the sale of land in relation to the operation of a golf course and asked whether the acquisition of another parcel of land would qualify as a "replacement property" for purposes of subsection 44(5) of the Income Tax Act.

Reference to statute provisions such as section, subsection, etc., mentioned herein will in all cases, unless otherwise stated, relate to the Income Tax Act S.C. 1970-71-72, c.63 as amended, consolidated to June 10,1993.

Although you have asked for a technical interpretation, the situation presented appears to be an actual fact situation. Should this situation involve a proposed transaction, you may wish to submit all relevant facts and proposed transactions for a binding advance income tax ruling. However, should this situation involve actual taxpayers and completed transactions you may wish to submit all relevant facts and documentation (including company names and identification numbers) to the appropriate District Taxation Office for their comments. We are, however, prepared to provide some general comments.

Our Comments

Where a disposition of a property takes place to which paragraph 44(1)(a) has application, the taxpayer is entitled to a rollover if he acquires a "replacement property" for a former property. Subsection 44(5) states that "a particular capital property of a taxpayer is a replacement property for a former property of the taxpayer, if

(a) it was acquired by the taxpayer for the same or a similar use as the use to which the taxpayer or a person related to the taxpayer put the former property,

(b) where the former...; and

(c) where the former ....".

To meet the conditions in (a) the former property need not to have been a business property and there is no requirement for it to have produced income in the past or that the replacement property has to produce income in the future. It might be noted that, while the particular property must be acquired by the taxpayer, there is no specific requirement in paragraph 44(5)(a) that the "particular capital property" actually be acquired for "the same or a similar use" by the taxpayer. The emphasis is on the "use" to be made of the acquired property and that it be the same or a similar "use" as the "use" to which the taxpayer or a related person to the taxpayer put the former property. Hence, it is necessary to interpret the word "use".

The "and" after paragraph (b) in subsection 44(5) makes it clear that the 3 paragraphs in that subsection are not mutually exclusive. Thus the conditions in all 3 paragraphs, if applicable, must be met. However, if the use condition in (a) is not met, you need not consider the matter further. On the other hand, if the "use" condition in (a) is met, the "similar business" condition in (b) and the residency condition in (c) must still be considered and met if those "where" factors are present. The "where" condition in (b) would be present if, "... the former property was used by the taxpayer or a person related to the taxpayer for the purpose of gaining or producing income from a business". Hence, given that the former property was used by the taxpayer or a person related to the taxpayer for the purpose of gaining or producing income from a business, the "similar business" condition in (b) must be met for involuntary as well as voluntary dispositions.

In our view, there is nothing contained in this provision to require that the "former property" must have produced income in the past or that the replacement property has to produce income in the future. Hence, in determining whether vacant land meets the "use test" required by paragraph 44(5)(a), the use made of the former property is not restricted solely to a use that produced income from that property. It is a question of fact whether use was made of the former property and whether the newly acquired property is to be put to the same or similar use. However, we would like to emphasize that vacant land would generally be excluded from the definition of replacement property as non-use does not constitute use.

Paragraph 7 of IT-153R3 reads, in part, as follows:

7. For purposes of subsection 18(2), paragraph 18(3)(a) specifies that land excludes a building or other structure affixed to land, the land beneath it and any contiguous parking area, driveway, yard, garden or similar land that is necessary for the use of that building or structure.

While Paragraph 18(3)(a) really defines unproductive land for purposes of subsection 18(2), in our view the unemployed land that, at any particular time, is not being used by a business, would be that land which is not contained within the exclusions as detailed in the definition. In other words, any land not in use by the business within the ambit of subsection 18(2) should not, in our opinion, be treated as an active business asset. It can be argued that subsections 18(2) and (3) do not pertain specifically to defining an active business asset, nevertheless, we feel that it would be difficult to demonstrate that such excess land has any present use. Accordingly, it would not appear that such excess land could be said to be used in an active business although, once again, much will depend on the facts of the particular case. Should such excess land be put in use some time in the future, its status could be different then.

The foregoing comments are given in accordance with the practice of providing opinions referred to in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990 and are not binding on Revenue Canada, Taxation.

We trust that you will find our comments of assistance.

Yours truly,

R. Albert
for Director
Business and General Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch