16 January 1995 Internal T.I. 9500450 - EXCHANGES OF PROPERTY-TAXPAYER OBJECTION RIGHTS

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.

REVENUE CANADA ROUND TABLE

MANITOBA INSTITUTE/BAR - FEBRUARY 1995

Question # 2

SUBJECT: SECTION 44(1) EXCHANGES OF PROPERTY - TAXPAYER OBJECTION RIGHTS

A taxpayer disposes of former business property in year one and replaces that former business property in year two. The taxpayer requests amendment of the year one tax return to apply for the deferral of the capital gain and recapture from the disposition of property in year one. If Revenue Canada does not accept that the conditions of section 44 have been met with respect to the former business property or replacement property, it appears that Revenue Canada has the power to deny their request to amend the year one tax return and the taxpayer has no power to object to Revenue Canada's denial. This assumes the year one tax return did not originally include (when it was originally assessed) the request for recapture and capital gains deferral as a result or the replacement in year two.

It seems odd that section 44 allows the taxpayer the right to exchange properties but where the replacement takes place in a subsequent taxation year, the taxpayer has no appeal rights if Revenue Canada does not accept the request to amend a tax return of a prior year when the former business property was originally disposed of.

Questions

i)Is it the department's intention that the taxpayer should not be entitled to objection and appeal opportunities in respect to the above scenario?

ii)How should taxpayers proceed to enforce their objection rights?

Department's Position

Paragraph 44(1)(b) of the Act, as amended, was enacted to assist taxpayers who carry on a business by providing a deferral of tax on capital gains. Paragraph 44(1)(b) enables the taxpayer to dispose of a capital property that is a former business property (the "Former Property") and acquire, prior to the end of the first taxation year following the year of disposition, a replacement property (the "Replacement Property") without adverse income tax consequences. In order to benefit from the rollover provided in section 44 of the Act, a taxpayer must elect in his return of income for the year in which he acquired the Replacement Property.

As such, the acquisition of a Replacement Property in the year subsequent to the disposition of the former business property will, where a valid election has been filed, require a retroactive adjustment to the prior year return to reduce the capital gain previously reported on the disposition of the Former Property.

The technical issue raised in your question is valid and has not been raised before. Therefore, we have informed the Department of Finance of the issue.

Author: P. Diguer
File Number: 7-950045
Date: January 16, 1995