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.
Principal Issues:
-Whether a property that is princiapally rented to third parties, or to related parties and used in their non-rental business would be a "former business property"
Position TAKEN:
-Properties principally rented to non-related third properties would be "rental property" and therefore excluded from the definition of "former business property. Properties principally rented to related persons would not be "rental property" and therefore would be considered "former business property"
Reasons FOR POSITION TAKEN:
Meaning of "former business property" and "rental property" as each term is defined in subsection 248(1) of the definition of "former busienss property".
941617
XXXXXXXXXX B. Kerr
Attention: XXXXXXXXXX
August 19, 1994
Dear Sirs:
Re: Replacement Property Rules
This is in response to your letters of June 16, July 13 and 16, 1994, wherein you requested our views on whether certain properties would qualify as former business properties.
The situation described in your letter involves a holding company that owns four properties which were acquired at different times and are held under four separate titles. The first property is an office building that is rented to and from which a related operating company carries on its active business. The second property is adjacent to the first property and is real property including a parking area that is also rented to the operating company and used for storage. The third property is adjacent to the second property and the fourth property is adjacent to the third property both of which consist of real property including a parking area. The real property is rented to arm's length third parties and the operating company uses the parking area for its vehicles. The first property is zoned for commercial use and the other three properties are zoned for residential use. The operating company has expanded over the years and all four properties were acquired with the intention of being used in the business of the operating company. However, difficulties are being encountered in having them rezoned for commercial use. The holding company intends on selling all four properties and acquiring another property at a different location that will be used by the operating company in its business.
You have asked us whether all four of these properties would be considered one property for the purpose of determining whether it is a "former business property" or whether each of the four properties would be considered to be "former business property" or whether a portion of each property would be considered to be a "former business property".
Unless otherwise stated all references to statute are references to the Income Tax Act S.C. 1970-71-72, c.63 as amended consolidated to June 10, 1993 (the "Act").
The situation described in your letters involves actual proposed transactions with identifiable taxpayers. Assurance as to the tax consequences of actual proposed transactions will only be given in the context of an advance income tax ruling. The procedures for requesting an advance income tax ruling are outlined in Information Circular 70-6R2 dated September 28, 1990, and the Special Release thereto dated September 30, 1992, issued by Revenue Canada, Taxation. However, we can offer the following general comments.
There is no provision in the Act that would allow separate properties acquired on separate occasions and held under separate title to be considered one "property", with the exception of paragraph 248(21)(c) in certain circumstances. The provisions of subsection 248(21) would not apply to your situation. Accordingly each property would have to qualify as a "former business property" on its own.
Where there has been a disposition of a former business property, subsection 44(1) of the Act permits a taxpayer to defer recognition of a capital gain and subsection 13(4) of the Act permits a taxpayer to defer recognition of recapture under certain circumstances. A paramount circumstance is that the former property qualify as a "former business property" of the taxpayer which is defined in subsection 248(1) of the Act to mean:
"a capital property of the taxpayer that was used by the taxpayer or a person related to the taxpayer primarily for the purpose of gaining or producing income from a business, and that was real property or an interest therein of the taxpayer, but does not include
(a)a rental property of the taxpayer,
(b)land subjacent to a rental property of the taxpayer,
(c)land contiguous to land referred to in paragraph (b) that is a parking area,..., or
(d)....
and, for the purposes of this definition, a "rental property" of a taxpayer means real property...used by the taxpayer in the taxation year in respect of which the expression is being applied for the purpose of gaining or producing gross revenue that is rent (other than property leased by the taxpayer to a person related to the taxpayer and used by that related person principally for any other purpose)..."
The words used primarily refer to the use of the property immediately before the disposition. This means the principal use of the property was to earn business income (but not rent) during that period. The test of whether a property is used "principally" for a given purpose is the proportion of time it is used for that purpose, in relation to other uses. If the property is used more than 50% of the time for the purpose of gaining or producing gross revenue that is rent, that pattern of use is a good indication that the property is used principally for that purpose. Another important factor to be considered is the proportion of the amount of space rented in relation to the total area of the building. Again if more than 50% of the total area is rented that is an indication that the property is being used principally for producing rental revenue.
In our view since properties one and two are being rented to a related person and are being used by that related person for a purpose other than gaining or producing rent they would not be considered to be rental property, and would therefore appear to qualify as "former business property". In our view properties three and four would not be considered to be "former business property" since the real property is being rented to arm's length third parties and therefore is "rental property" and the parking area is contiguous to the rental property.
Since the four properties cannot be considered one, it cannot be said that either of properties three and four are used in part to earn gross revenue that is rent and in part to earn income from a business such that the factors as outlined in your letter and in paragraph 4 of Interpretation Bulletin IT-491 would not be relevant in determining the principal use of the property. However, even if the operating company was paying rent for the parking space and those factors in IT-491 were considered, it would appear that each property would still be considered to be used principally to produce gross revenue that is rent and therefore be considered to be a "rental property" since paragraph 248(1)(c) of the definition of "former business property" specifically excludes land contiguous to the land that is subjacent to a rental property that is a parking area.
Finally as stated in paragraph 3 of IT-491 even though a property is used to earn qualified business income it would be disqualified as a former business property if it was used in the taxation year in which it was disposed of principally for the purpose of producing rent. As already stated, a property is considered to be used principally for a given purpose if is used than 50% of the time or if more than 50% of its space is used for that purpose. In other words the property is either classified as a "rental property" or it is a "former business property" but not both in the same taxation year. Accordingly, no proration of the property is permitted to say that a certain portion is a rental property and the remaining portion is a former business property.
We trust that these comments will be of assistance.
Yours truly,
R. Albert
for Director
Business and General Division
Rulings Directorate
Policy and Legislation Branch
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