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.
TAX EXECUTIVE INSTITUTE
December 10, 1996
Question No. XlV.
REPLACEMENT PROPERTY
Proposed amendments to paragraph 13(4.1)(a) of the Act in the June 20, 1996, Notice of Ways and Means Motion will add the condition that in order for a particular depreciable property to qualify as a replacement property it must be "reasonable to conclude that the property was acquired by the taxpayer to replace the former property." Will the Department confirm that, when the second machine is acquired, it qualifies as a "replacement property" with respect to the first machine even though the second machine was originally ordered and intended for expansion of the business in the following scenario:
A corporate taxpayer receives approval from its board of directors to expand its packaging operations, which currently consists of one packaging machine, by acquiring a second packaging machine. The new machine is under construction at the taxpayer's business by the equipment supplier when the existing machine is partially destroyed by fire. Title and ownership of the second machine passes to the taxpayer shortly after insurance proceeds for the destroyed first machine are received but subsequent to the end of the taxpayer's taxation year in which recaptured capital cost allowance on the disposition of the first machine was reported in income.
DEPARTMENT'S POSITION
There would be several factors that would have to be taken into consideration in deciding whether it was "reasonable to conclude that the property was acquired by the taxpayer to replace the former property." Generally, a property will bear the same physical description as the former property and while there is no requirement in the Act that the replacement property be acquired after the disposition of the former property, there should be some correlation or direct substitution between the disposition of the former property and the acquisition of the replacement. In the above scenario, a decision had already been made and the actual process of acquiring the property for expansion had commenced before the involuntary disposition took place. In our view, therefore, the requirement of paragraph 13(4.1)(a) would not be met.
Author:A. M. Brake
File:5-963910.MB
Date:November 28, 1996
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