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 Act.
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 $100,000.
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 Revenue Canada.
Business and Publications Division
Income Tax Rulings and
Policy and Legislation Branch
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