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 the replacement property rules apply on the sale of a portion of a ranch as a result of a possible expropriation that had been rented out since its acquisition?
Position TAKEN:
It depends on all the facts, including the circumstances pertaining to the sale of the former property and whether a replacement property has been acquired within a certain time frame. For example, however, a sale based on the rumour of a possible expropriation that does not include a notice of intention would not qualify under paragraph 44(1)(a) and a rental property does not meet the definition of "former business property" and would not qualify under paragraph 44(1)(b). In addition, inter alia, the replacement property must be acquired for the same or similar use to which the taxpayer or a person related to the taxpayer put the former property.
Reasons FOR POSITION TAKEN:
Several questions of fact need to be resolved. Damka Lumber case for the 44(1)(a) example and the definition of "former business property" under subsection 248(1) for the 44(1)(b) example. The definition of "replacement property" under subsection 44(5).
950020
XXXXXXXXXX B. Kerr
Attention: XXXXXXXXXX
July 18, 1995
Dear Sirs:
Re: Replacement Property Rules
This is in reply to your letter of December 22, 1994, wherein you requested our views on the application of subsection 13(4) and section 44 of the Income Tax Act (the "Act"). We apologize for the delay in responding.
The situation described in your letter involves an individual resident of Canada who is also a U.S. citizen and files both Canadian and U.S. income tax returns. The individual owns an interest in a ranch situated in XXXXXXXXXX that has been rented since it was acquired by way of inheritance. A portion of the land and a building thereon was sold to the state in 1993, as a result of a potential expropriation for road widening and construction. You have been advised that the replacement property rules under U.S. income tax law would apply to defer the gain from the disposition of the property provided a replacement property is acquired within two years.
You have requested our views on whether the replacement property rules in subsection 13(4) or section 44 of the Act would apply to defer the gain and whether the replacement property can be another type of rental property or does it have to be farm land.
In addition if the replacement property rules do not apply, you have asked us whether the provisions of the Canada-U.S tax treaty dealing with competent authority would apply to obtain a deferral from Canadian income tax. In other words, whether a taxpayer can defer taxation in Canada on the gain in respect of a disposition of property in the U.S. pursuant to Article XXVI (Mutual Agreement Procedure) of the Canada-U.S. Income Tax Convention (the "Convention") where the taxpayer is a resident of Canada and such disposition of property is not subject to tax in the U.S. because of the non-recognition rule in the U.S. but is subject to tax in Canada.
The situation outlined in your letter involves an actual fact situation. To the extent that it relates to a past transaction you should contact the appropriate Tax Services Office, since the review of such transactions falls within their responsibility and it is the practice of this Department not to comment on such transactions when the identities of the taxpayers are not known. If it relates to a proposed transaction, 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 (IC 70-6R2) dated September 28, 1990 issued by Revenue Canada, Taxation. However we can offer the following general comments which we hope will be of assistance to you.
The replacement property rules, in subsection 13(4) in respect of depreciable property or in subsection 44(1) in respect of capital property, apply when certain conditions are met. In either case, inter alia, there must be a disposition, under certain circumstances or of a certain type, of former property and an acquisition of a replacement property within a certain time period.
Property the proceeds of disposition of which were compensation for property taken under statutory authority or the sale price of property sold to a person by whom notice of an intention to take it under statutory authority was given would be an example of qualifying circumstances involving the disposition of a "former property". However, it is a question of fact whether a particular property was taken or sold under such circumstances. For example, a sale based on the rumour of a possible expropriation that did not include a notice of intention was held not to qualify in the Damka Lumber (90 DTC 6101) case. Additional comments concerning expropriations may be found in paragraph's 1-5 of Interpretation Bulletin IT-271R.
A property that was, immediately before the disposition, a former business property of the taxpayer would be a qualifying type of "former property". However, the definition of "former business property" in subsection 248(1) of the Act excludes rental property.
The term "replacement property" is defined in subsections 13(4.1) and 44(5) of the Act, respectively. A particular depreciable property would have to meet the three requirements, if applicable, provided under subsection 13(4.1), whereas a particular capital property would have to meet the three requirements, if applicable, under subsection 44(5) in order to qualify as a "replacement property". In either case one of the requirements that would have to be met is that the particular property be acquired by the taxpayer for the same or similar use as the use to which the taxpayer or a person related to the taxpayer put the former property. In addition, in the special release to Interpretation Bulletin IT-259R2 dated December 1, 1994, it has also been stated in paragraph 16 that "the Department will usually consider another property as being a replacement property acquired for the "same or similar use"...if it generally bears the same physical description as the former property....It must be kept in mind, however, that the "same or similar use" test...is still a separate test from...the "same or similar business" test....Thus, for example, if a company owned a residential property used to house its employees, the Department would generally not consider a building used to carry on the company's day-to-day operations as having the same or similar use even though both properties are real property and are used in the same business.". Accordingly, it would not be appropriate to replace farm land with a residential building, nor would it be appropriate to replace a property used to earn property income, with a property used to earn business income.
The purpose of the Convention is for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and on capital. The parties to the Convention recognize that the total elimination of double taxation may not be achievable. Consequently, in addition to the provisions in Article XXIV (Elimination of Double Taxation), the Convention provides certain rules to deal with the problems of double taxation, such as paragraphs 7 and 8 of Article XIII with respect to the timing difference in the taxation of capital gains.
No mutual agreement has been entered into by the competent authorities of Canada and the U.S. with respect to the problem at hand. As evidenced by provisions such as paragraphs 7 and 8 of Article XIII of the Convention which deal specifically with timing problems, it is not the practice of the competent authorities to enter into an agreement with respect to the timing problem such as the one referred to in this case.
As paragraph 8 of Article XIII of the Convention is not applicable in this case because the disposition is not in the course of a reorganization, in the event that a replacement property has been acquired by the taxpayer in the U.S. such that the non-recognition rule of the U.S. applies, the taxpayer may elect in his or her annual return of income for the year of disposition to be liable to tax in the U.S. pursuant to paragraph 7 of Article XIII of the Convention so as to avoid double taxation.
We trust that these comments will be of assistance.
Yours truly,
R. Albert
for Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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