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.
XXXXXXXXXX Tim Bryant
December 16, 1996
We are writing in reply to your letter of July 31, 1996 in
which you have requested that we confirm your interpretation
of the Income Tax Act in regard to a calculation involving
the replacement property rules in section 44. We apologize
for the delay in replying.
You have described the hypothetical situation as follows:
A taxpayer in the business of farming sells a parcel of land
containing 160 acres for $200,000 ("the original land"). It
has no buildings on it and meets the definition of "former
business property" in subsection 248(1) of the Income Tax
As a replacement, the taxpayer acquires a parcel of property
containing 160 acres along with a grain storage building.
The purchase price for the property is $200,000 which is
allocated $160,000 to the land and $40,000 to the building.
This property will be a replacement property as defined in
subsection 44(5) of the Act.
The adjusted cost base (ACB) of the original land is
$100,000. Accordingly, the capital gain calculated without
regard to any replacement property election will be
In your view, the application of section 44 results in the
full amount of the capital gain on the original land being
deferred, the ACB of the replacement land being reduced to
$100,000 and the capital cost of the buildings acquired
being reduced to zero.
Assuming that both the land and building acquired to replace
the original parcel of land qualify as "replacement
properties" (see below under the heading "Replacement
Property" where we discuss our concerns about this
assumption) for the original land, we agree that the full
amount of the capital gain on the disposition of the
original land is deferred. However, we disagree with your
calculation of the ACB of the replacement land and the
capital cost of the building.
Paragraph 28 of IT-259R2, Exchanges of Property discusses
the situation where one property is replaced by two or more
replacement properties. In such cases, the cost of each
replacement property can be aggregated in determining the
amount of the gain from the former business property.
Therefore, since the aggregate cost of the replacement land
and building equals the proceeds of disposition of the
original land, the gain on the land will be fully deferred
under paragraph 44(1)(e). However, in determining the
consequential reduction in the ACB of the land and the
capital cost of the building under paragraph 44(1)(f), the
deferred gain is allocated to the two properties based on
the proportion that the original cost of the replacement is
to the total cost of all replacement properties. Therefore,
since the gain being deferred is $100,000 the ACB reduction
in the land should be $80,000 (calculated as $100,000 x
$160,000/$200,000) resulting in an ACB of $80,000 ($160,000
- $80,000). The capital cost reduction in the building
should therefore be $20,000 resulting in a capital cost of
$20,000 ($40,000 - $20,000).
One of your assumptions is that the parcel of property
containing 160 acres along with a grain storage building is
a replacement property. You should note that the
replacement land and building are treated as separate
properties for the purposes of section 44. It is a question
of fact as to whether the land and building are each
replacements for the original parcel of land. The fact that
the specific funds received for the former property are used
to acquire another property in no way bears on the
determination of whether or not the acquired property (or
properties) constitute a replacement. In addition, the
replacement property would generally bear the same physical
description as the former property, e.g. land replaced by
land or a building replaced by a building. Given this and
the limited facts provided we have difficulty envisaging
that a grain storage building would represent a replacement
for vacant land. There are however cases where a different
type of property could provide the same use or function as
the former property and could conceivably include a
replacement of land with land and a building.
If it is determined that only the land constitutes a
replacement property, the gain on the original land will be
$40,000 which is the proceeds of disposition of the original
land ($200,000) minus the cost of the replacement land
($160,000). The ACB of the land, in this case, would be
$100,000 which represents the original $200,000 cost of the
land less the deferred gain of $60,000.
We trust these comments are of assistance to you.
The foregoing comments are given in accordance with the
practice referred to in paragraph 21 of Information Circular
70-6R2 dated September 28, 1990 and are not binding on
Business and Publications Division
Income Tax Rulings and
Policy and Legislation Branch
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