7 October 1998 External T.I. 9803725 - REPLACEMENT PROPERTY RULES

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 980372
B. Kerr
Attention: XXXXXXXXXX

October 7, 1998

Dear Sirs:

Re: Replacement Property Rules

This is in response to your letter of January 19, 1998, concerning the application of the replacement property rules.

You have described a situation where a partnership of six siblings owns several commercial real estate properties. One of the properties is leased to an operating company and used in its active business. The operating company is owned by a holding company. The common shares of the holding company are owned by a family trust, the trustees of which are one of the siblings, his spouse and an arm's length person. Decisions made by the trustees are done on a majority basis. That same sibling personally owns non-voting preferred shares of the operating company.

The partnership plans to dispose of the property rented to the operating company and to immediately acquire a replacement property that will be rented to and used by the operating company in its active business.

You have asked whether the partnership is related to the operating company such that the requirement found in the definition of "former business property" in subsection 248(1) of the Income Tax Act (the "Act"), is satisfied.

Our Comments

The situation described in your letter involves an actual fact situation. As it relates to a proposed transaction, assurance as to the tax consequences will only be given in an advance income tax ruling. The procedures for requesting an advance income tax ruling are outlined in Information Circular 70-6R3 dated December 30, 1996 issued by Revenue Canada. However, we can provide the following general comments.

Subsection 248(1) of the Act defines "former business property" to mean capital property that was used by the taxpayer or a person related to the taxpayer primarily for the purpose of gaining or producing income from a business and that was real property or an interest therein, but does not include a rental property of the taxpayer. "Rental Property" is further defined to mean real property owned by the taxpayer and used in the particular year principally for the purpose of gaining or producing gross revenue that is rent. However, property leased by the taxpayer to a person related to the taxpayer and used by that related person principally for any purpose (other than gaining or producing gross revenue that is rent) would not be considered "rental property".

For a corporation and another person to be related, there must be an element of control, either singly under subparagraph 251(2)(a)(i) or through a related group under subparagraph 251(2)(a)(ii) of the Act. Paragraph 1 of Interpretation Bulletin IT-90 states that a partnership is not a person, nor is it deemed to be within the meaning of the Act, notwithstanding that section 96 provides that the income of a member of a partnership is computed as if the partnership were a separate person. Since a partnership is not a person for the purposes of subsection 251(2) of the Act, it cannot be considered that the corporation is related to the partnership and therefore the replacement property rules cannot apply to your situation. There are no look-through provisions in the Act which would enable us to give you the desired results.

We trust that these comments will be of assistance.

Yours truly,

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