28 September 1995 External T.I. 942985A - REPLACEMENT PROPERTY - CALCULATION OF DEFERRED GAIN

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 clause 44(1)(e)(i)(B) 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.

		September 28, 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 further to our telephone conversation (XXXXXXXXXX/Chouinard) regarding page 6 of the latest submission made by the above-mentioned taxpayer.

You have asked us to review the calculation set out on page 6 and to indicate whether we agree with the taxpayer's calculation of the deferred capital gain pursuant to section 44 of the Act, as it relates to their situation.

We have considered the calculation on page 6 of the taxpayer's submission and cannot agree with the taxpayer's method of determining the deferred capital gain. As we indicated in our memorandum to you of June 7, 1995, whether a property is in fact a replacement property for another must be determined in every instance, and 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. In this situation, since land and building are replaced by land and building, in our view, the computation of the taxpayer's capital gain upon the disposition of the former 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.

R. Albert
for Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch