11 February 1998 External T.I. 9709355 - Is partnership of corp's S/H related to corp

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 a corporation's building which is used by a partnership, the members of which are the corporation's shareholder, qualifies as a "former business property" for purposes of section 44 of the Act.

Position: No.

Reasons:

The definition of former business property requires that the property be used by the taxpayer or a related person. Neither the partnership nor its members are related to the taxpayer.

J. Gibbons
XXXXXXXXXX 5-970935

Attention: XXXXXXXXXX

February 11, 1998

Dear XXXXXXXXXX:

We are replying to your letter of March 25, 1997, regarding the replacement property rules in section 44 of the Income Tax Act (the “Act”). You inquire whether these rules will apply where a corporation replaces a building with a larger building. The building is currently rented to a partnership, the members of which are the corporation’s shareholders. The new building will be rented to the same partnership for the same purpose, i.e., to operate its accounting practice.

Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R3. The following comments are, therefore, of a general nature only.

Subsection 44(1) of the Act allows taxpayers to defer taxable capital gains in respect of the disposition of capital property if they acquire a "replacement property." Where the disposition is voluntary, the property disposed of must qualify as a “former business property.” The term “former business property” is defined in subsection 248(1) of the Act and generally refers to capital property of the taxpayer that was used by the taxpayer or a related person primarily for the purpose of gaining or producing income from a business and that was real property of the taxpayer or an interest of the taxpayer in real property.

In the situation described in your letter, although the building may be used by the partnership for business purposes, it would not satisfy the definition of “former business property,” since neither the partnership nor its members are related to the corporation, within the meaning of subsection 251(2) of the Act. Therefore, the rollover provisions of section 44 of the Act would not apply on the disposition of the building. In addition, since the definition of “replacement property” in subsection 44(5) of the Act requires that property be acquired by the taxpayer for the purpose of earning income from the same or a similar business or for use by a related person for such a purpose, and as the partnership is not a related person, the new property would fail to qualify as a replacement property. Moreover, when analysing the replacement property rules, the Department does not accept as a replacement property any excess property acquired as a replacement for the former property.

We trust that these comments will be of assistance.

Yours truly,

C. Chouinard
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

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