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:
How to calculate the capital gain under subparagraph 44(1)(e)(i) of the Act where 8 former properties consisting of land and buildings are replaced with 10 other similar properties.
Position TAKEN:
The capital gain must be determined on a property by property basis and, where land and building are replaced with land and building, the capital gain on land cannot be deferred against the cost of the replacement building, nor can the capital gain on the building be deferred against the cost of replacement land.
Reasons FOR POSITION TAKEN:
The Department considers that a property is a replacement for a former property where it can reasonably be considered to have been substituted for the use of that former property. Generally, the replacement property will bear the same physical description as the former property, e.g., land replaced by land or a building by a building, but there may be cases where a different type of property provides the same use or function as the former property. In this particular case, since the former land and former buildings were replaced with the same type of property, namely land and buildings, and since land is not considered to bear the same physical description as a building, the buildings cannot reasonably be considered to have been substituted for the land, nor can the land be considered to have been replaced with the buildings.
June 7, 1995
XXXXXXXXXX Tax Services HEADQUARTERS
Business Audit C. Chouinard
Attention: XXXXXXXXXX 957-8953
7-942985
XXXXXXXXXX - Section 44 of the Income Tax Act
This is in response to your memorandum of November 18, 1994, wherein you requested our opinion on the application of section 44 of the Income Tax Act (the "Act") in a situation involving the expropriation of three properties. We apologize for the delay in our response.
Facts
Our understanding of the facts is as follows:
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XXXXXXXXXX
Taxpayer's Position
In the taxpayer's opinion, since the properties acquired in replacement of the former properties all constitute replacement properties within the meaning of subsection 44(5) of the Act, subparagraph 44(1)(e)(i) of the Act applies in such a manner as to completely defer the capital gain arising on the expropriation, since the proceeds of disposition of the former properties ($XXXXXXXXXX) do not exceed the cost of new properties 1, 2 and 3 ($XXXXXXXXXX). The taxpayer argues that the Tax Services office's position is contrary to subsection 44(1) of the Act in that it requires that the physical characteristics of a replacement property be the same or similar to the physical characteristics of the former property. In the taxpayer's view, the replacement buildings are replacement property for the former land and the replacement land is replacement property for the former buildings.
Tax Services Office Position
You are of the opinion that, although the new properties meet the requirements of subsection 44(5) of the Act, subparagraph 44(1)(e)(i) of the Act operates in such a manner that it does not, in this particular situation, provide a total deferral of the capital gain arising on the expropriation. In determining the amount of the capital gain that can be deferred under subparagraph 44(1)(e)(i) of the Act, you are of the view that the former land must be matched to the replacement land and the former buildings to the replacement buildings.
In order for the provisions of subsection 44(1) of the Act to apply, the taxpayer must dispose of, and acquire as a replacement, a capital property. Paragraph 44(5)(a) of the Act provides that a particular property is a replacement property if it is acquired for the same or similar use as the use to which the taxpayer or a person related to the taxpayer put the former property. As indicated in paragraph 15 of Interpretation Bulletin IT-259R2, in interpreting the phrase "the same or similar use", the Department considers that a property is a replacement for a former property where it can reasonably be considered to have been substituted for the use of that former property. Thus, where the former property was not used by the taxpayer itself but was rented to a third party, a property acquired for the same rental purpose would be considered to be its replacement. In addition, generally, the replacement property will bear the same physical description as the former property, e.g., land replaced by land or a building by a building, but there may be cases where a different type of property provides the same use or function as the former property. However, as stated in IT-259R2, whether a property is in fact a replacement for another must be determined in every instance. While it may be possible in a particular fact scenario to replace a building with land, land with a building or building or land with land and building, if those properties are all that is involved, in any situation where land and building are replaced by land and building, in our view, the land must be a replacement for the land and the building a replacement for the building.
As noted above, in this scenario, where land and building are replaced by land and building, in the opinion of the taxpayer's representative, the land can be a replacement property for a building and a building a replacement for the land. Accordingly, in calculating the capital gain on the disposition of land, the proceeds of disposition of land can be netted against the cost of a new building, and vice versa. In our view, subsection 44(6) of the Act makes clear that the capital gain on the disposition of land and buildings cannot be calculated in the manner suggested by the taxpayer's representative. If the capital gain arising on the disposition of land could be offset against the cost of a new building, there would be no need for subsection 44(6) of the Act which provides a special rule for a taxpayer who has disposed of a former business property (referred to in subsection 44(1) of the Act as the taxpayer's "former property"), consisting in part of a building and in part of related land. In such circumstances, the taxpayer may elect, for purposes of subsection 44(1) of the Act, to treat any excess of the proceeds of disposition of one such part over the replacement cost of that part as proceeds of disposition of the other part. This allows, for example, a complete rollover where a taxpayer has moved from a downtown location to a suburban location and replaced old land and a building with new land and a building having a combined cost equal to the proceeds of sale of the old property, even though, the new land is less expensive than the old land and the new building is more expensive than the old building. Since subsection 44(6) of the Act only applies in respect of replacement property that qualifies as "former business property", in our view, a reallocation of the type described in subsection 44(6) is not possible as regards other replacement property.
As regards clause 44(1)(e)(i)(B) of the Act, paragraph 4 of IT-259R2 indicates that where more than one capital property has been disposed of in circumstances where subsection 44(1) of the Act is applicable, the provisions of that subsection apply to each such property and its replacement property individually. In the case of land and buildings thereon, this term is considered to refer to land and each individual building thereon separately and, for purposes of subsection 44(1) of the Act, the capital gain on each of these properties should be calculated separately. Accordingly, in our opinion, in the situation described above, each former property must, for purposes of calculating the capital gain on the disposition of such property, be matched with a replacement property, such that only capital gains resulting from specific acquisitions matched with specific dispositions are deferred and the pooling of expenditures taken by the taxpayer should not be permitted.
Therefore, in our view, the computation of the taxpayer's capital gain upon the disposition of the above-mentioned properties must be determined on a property by property basis and the capital gain on land cannot be deferred against the cost of a replacement building (except as regards former property 3, if based on the facts the land and building can be considered a replacement for the land), nor can the capital gain on a building be deferred against the cost of replacement land.
XXXXXXXXXX
R. Albert
for Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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