30 November 1998 External T.I. 9823275 - REPLACEMENT PROPERTY -ECP

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 conditions in subsection 14(7) of the Act are satisfied such that subsection 14(6) of the Act applies to a disposition of eligible capital property.

Whether subsection 14(3) of the Act applies to the replacement property when it is acquired from a non-arm's length person.

Position:

Question of fact whether conditions in subsection 14(7) of the Act are satisfied in any given situation. Subsection 14(3) of the Act applies.

Reasons:

Must satisfy the "similar use" test in paragraph 14(7)(a.1) of the Act and the "same or similar business" test in paragraph 14(7)(b) of the Act.

Subsection 14(3) of the Act applies to the acquisition of a replacement property by a corporation from a controlling shareholder.

								982327
XXXXXXXXXX 						A. Seidel
(613) 957-8974
Attention: XXXXXXXXXX 

November 30, 1998

Dear Sirs:

Re: Replacement Property Rules

This is in reply to your letter dated August 12, 1998 in which you requested a technical interpretation with respect to the replacement property rules in subsections 14(3) and (6) of the Income Tax Act (the "Act").

The situation described in your letter appears to relate to specific taxpayers and an actual fact situation. To the extent that you require assistance in determining the current tax status of the taxpayers involved, you should contact your local Tax Services Office. To the extent that you require confirmation of the tax consequences of proposed transactions, we bring to your attention Information Circular 70-6R3 dated December 30, 1996 issued by Revenue Canada. Confirmation with respect to proposed transactions involving specific taxpayers should be the subject of a request for an advance income tax ruling. If you wish to obtain an advance income tax ruling for particular taxpayers with respect to specific contemplated transactions, a written request for an advance income tax ruling should be submitted in accordance with the Information Circular. Nevertheless, we can provide you with the following general comments with respect to the application of subsections 14(3) and (6) of the Act.

Subsection 14(6) of the Act provides for an election to exclude the proceeds from the disposition of an eligible capital property, as defined in section 54 of the Act, in the calculation of "cumulative eligible capital," defined in subsection 14(5) of the Act, in the situation where a taxpayer disposes of an eligible capital property in a particular taxation year and acquires another eligible capital property as a replacement for the former property before the end of the taxation year following the year of disposition. Pursuant to paragraph 14(6)(b) of the Act, the excluded proceeds are included in the calculation of "cumulative eligible capital" at the later of the time the replacement property is acquired by the taxpayer and the time the former property was disposed of by the taxpayer.

Interpretation Bulletins IT-123R ("IT-123R") and IT-259R3 ("IT-259R3") respectively discuss "Dispositions of and Transactions Involving Eligible Capital Property" and "Exchanges of Property." A particular acquired property will qualify as a replacement property for a former property in those situations where the conditions outlined in paragraph 14 of IT-259R3 are met. The conditions outlined therein include the requirement that the replacement property must be acquired for a use that is the same as or similar to the use of the former property and the requirement that it must be acquired for the purpose of gaining or producing income from the same or a similar business. Paragraph 17 of IT-259R3 provides a discussion of the expression "same or a similar use" and provides that the acquired property will generally qualify as a replacement property if it is acquired to gain or produce income from the same or a similar business and it generally bears the same physical description as the former property. Paragraph 18 of IT-259R3 provides a discussion of the term "similar business," it states that the term is "interpreted in a reasonably broad manner" and that two businesses will be considered to be "similar" if they both fall within, amongst others, "farming."

Generally, in the situation where a taxpayer, directly or indirectly, in any manner whatever, acquires an eligible capital property from a person or partnership with whom the taxpayer does not deal at arm's length and the transferor has claimed a capital gains exemption pursuant to section 110.6 of the Act, subsection 14(3) of the Act applies to effectively reduce the taxpayer's eligible capital expenditure, within the meaning of subsection 14(5) of the Act, by 4/3 of the total of all amounts that may reasonably be considered to have been claimed as a capital gains exemption in respect of the disposition of that property by the transferor or any other disposition of that property before that time. By virtue of paragraph 251(1)(a) and subparagraph 251(2)(b)(i) of the Act, a corporation and its controlling shareholder do not deal at arm's length.

These comments are provided in accordance with the guidelines set out in paragraph 22 of IC 70-6R3 and are therefore not binding on Revenue Canada.

Yours truly,

for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch
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