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:
1.Whether paragraph 44(5)(a) of the Act requires replacement property to be acquired by the same person who owned the former property?
2.Where the former property was land, whether paragraph 44(5)(c) of the Act requires the replacement property to be land situated in Canada? Also, whether it requires the replacement property to be situated in the same geographical area as the former property?
3.Whether paragraph 44(5)(b) of the Act requires the replacement property to be used in exactly the same manner as the former property, or whether it must simply be used in the same business?
4.Whether paragraph 44(5)(b) of the Act requires that the persons using the replacement property be the same as the persons who used the former property?
5.Whether excess property acquired in replacement of former property will qualify as replacement property?
6.Whether, where more than one property is acquired in replacement of a former property, the cost of each replacement property can be aggregated in determining the amount of the gain from the former property?
Position TAKEN:
1.Replacement property must be acquired by the same person who owned the former property.
2.Land must be situated in Canada. Geographical location in Canada is not a critical factor.
3.Replacement property does not have to be used in exactly in same manner, provided it is used in the same business.
4.Persons do not have to be the same. It is only necessary that they be related to the taxpayer who acquires the replacement property.
5.Excess property will probably not qualify.
6.Cost of each replacement property can be aggregated.
Reasons FOR POSITION TAKEN:
1.Paragraph 44(5)(a).
2.Paragraph 44(5)(c)
3.The Department interprets the term "similar business" in a reasonably broad manner. In this respect, the Department will consider two businesses to be "similar" if they both fall within the same category.
4.Paragraph 44(5)(b).
5.There must be a specific correlation between the disposition of the former business property and the acquisition of the replacement property. Moreover, the Department has taken the position that the provisions of section 44 are not intended to encompass business expansions.
6.Paragraph 28 of IT-259R2.
5-942486
XXXXXXXXXX C. Chouinard
Attention: XXXXXXXXXX
January 30, 1995
Dear Sir:
Re: Replacement Property Rules
We are writing in response to your letter of September 26, 1994, wherein you requested our comments on the application of subsection 44(5) of the Income Tax Act (the "Act") in a particular situation.
In the situation you describe, a family farm corporation, the shares of which are owned by an individual, owns approximately XXXXXXXXXX acres of land and farm buildings, all of which are leased by the corporation to a family farm partnership consisting of the individual, his spouse and his son, who uses it in a farming business. The individual also leases approximately XXXXXXXXXX acres of land owned by other farmers. The primary farming activities involve
XXXXXXXXXX
The individual's other children are also involved in the farming business as employees. It is expected that the family farm corporation will sell its land in years to come. The individual wishes each of his children to carry on the farming way of life and is prepared to devote as much of the proceeds of sale of the existing farm as are required to set up each of his children in the business of farming. Accordingly, it is proposed that, once the XXXXXXXXXX acres of land has been sold, the family farm corporation acquire up to XXXXXXXXXX farms (one for each of the children), totalling approximately XXXXXXXXXX acres of land.
Given this scenario, you ask the following questions:
1.Does paragraph 44(5)(a) of the Act require the replacement property to be acquired by the family farm corporation?
2.Where the former property was land, does paragraph 44(5)(c) of the Act require the replacement property to be land situated in Canada? Does it require the replacement property to be situated in the same geographical area as the former property?
3.Does paragraph 44(5)(b) of the Act require the replacement property to be used in exactly the same manner as the former property, i.e.,
XXXXXXXXXX
or must it simply be used in the business of farming?
4.Does paragraph 44(5)(b) of the Act require that the persons using the replacement property be the same as the persons who used the former property?
5.Does paragraph 44(5)(b) of the Act place limits on the amount of land that will qualify as replacement property?
6.In calculating the capital gain that can be deferred under subsection 44(1) of the Act, can the family farm corporation use, as adjusted cost base of the land purchased, the aggregate cost of each farm purchased for use by the individual's children?
Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R2. The following comments are, therefore, of a general nature only, and are not binding on the Department.
Our comments regarding your queries are in the same order as the questions above:
1.Paragraph 44(5)(a) of the Act requires the replacement property to be acquired by the taxpayer who owned the former property. Accordingly, in the situation you describe, since the former property was owned by the family farm corporation, the replacement property would have to be acquired by the family farm corporation.
2.According to paragraph 44(5)(c) of the Act, where the former property was a taxable Canadian property or would have been if the taxpayer was a non-resident, the replacement property must also be a taxable Canadian property. "Taxable Canadian property" is defined in paragraph 115(1)(b) of the Act. It includes real property situated in Canada and any capital property used in carrying on a business in Canada. Therefore, in response to your question, since the former property constitutes "taxable Canadian property", any land acquired in replacement of the former property would also have to be "taxable Canadian property", thus it would have to be situated in Canada. However, as to the location in Canada of the land acquired, it is our view that geographical location would not necessarily be a critical factor in establishing the use of an asset which otherwise qualifies as a replacement property.
3.As indicated in paragraph 17 of Interpretation Bulletin IT-259R2, the Department interprets the term "similar business" as used in the phrase "from that or a similar business" in paragraph 44(5)(b) of the Act in a reasonably broad manner. In this respect, the Department will consider two businesses to be "similar" if they both fall within the same category, one of which is farming. Therefore, it is not required that the replacement property be used in exactly the same fashion as the former property, i.e.,
XXXXXXXXXX
provided it is used for the purpose of gaining or producing income from activities which constitute farming.
4.Paragraph 44(5)(a) of the Act only requires that the replacement property acquired by a taxpayer be put to the same or similar use as the use to which the taxpayer or a person related to the taxpayer put the former property. Paragraph 44(5)(b) of the Act requires that the replacement property be used by either the taxpayer or a person related to the taxpayer to gain or produce income from the same business or a similar business as the business in which the former property was used. Hence, it is not necessary that the replacement property be used by the same person who used the former property. It is only necessary that the person or persons using the replacement property be related to the family farm corporation.
The property is presently used by a partnership consisting of the individual, his spouse and his son. Although a partnership is not a person, for purposes of paragraphs 44(5)(a) and (b) of the Act, the Department considers that, where every member of a partnership is related to a taxpayer, the partnership satisfies the requirements of "a person related to the taxpayer".
5.Generally, when analysing the replacement property rules, the Department does not accept, as a replacement property, any excess property acquired as a replacement for the former property. Furthermore, as stated in paragraph 10 of IT-259R2, there must be a specific correlation between the disposition of the former business property and the acquisition of the replacement property. Accordingly, the words "replacement property" contemplate a direct substitution, such that there is a causal relationship between the disposition of the former property and the acquisition of the replacement property. Moreover, the Department has taken the position that the provisions of section 44 are not intended to encompass business expansions, which appear, in part, to be the nature of the proposed acquisitions. In our view, only a small part of the XXXXXXXXXX farms (totalling approximately XXXXXXXXXX acres in land) which the taxpayer is proposing to acquire could be considered to be a replacement for the farm (totalling XXXXXXXXXX acres in land) which is presently owned by the taxpayer.
6.As indicated in paragraph 28 of IT-259R2, where one property is replaced by two or more replacement properties, for the purpose of subsection 44(1) of the Act, the cost of each replacement property can be aggregated in determining the amount of the gain from the former 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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