16 December 1998 Ministerial Correspondence 9827264 - REPLACEMENT PROPERTY - LARGER IN SIZE.

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 3,000 acres of new farmland can be considered replacement property for 200 acres of farmland.

Position: Only a small portion of the 3,000 acres likely qualifies as replacement property.

Reasons: It is our longstanding position that the replacement property rules do not encompass business expansions.

December 16, 1998

The Honourable Lyle Vanclief, P.C., M.P.

Minister of Agriculture and Agri-Food
House of Commons
Ottawa, Ontario
KIA OA6

Dear Colleague:

Thank you for your letter of October 1, 1998, in which you request clarification on the application of provisions in the Income Tax Act concerning replacement property.

The replacement property provisions in the Act allow a taxpayer who realizes a capital gain on the disposition of certain property to defer recognition of the gain if the taxpayer reinvests the proceeds of disposition in a replacement property within a certain period of time. One of the rules contained in these provisions provides that a property will only qualify as a replacement property if it is reasonable to conclude that it was acquired by the taxpayer to replace the former property. This particular rule was recently added by Bill C-28 and is effective for dispositions occurring after 1993. This means that there must be some correlation or direct substitution, that is, a causal relationship between the disposition of a former property and the acquisition of a replacement property. The purchase of excess property to shelter a capital gain would not meet the requirements in the Act.

In the circumstances we were asked to review earlier, 200 acres of farmland were being replaced by 3,000 acres of new farmland. In providing general comments on this situation, we gave the opinion that this was likely a business expansion and only a small part of the new farm could be considered a replacement for the old farm. This view is consistent with the replacement property rules, which clearly do not encompass business expansions. The replacement property rules are explained fully in Interpretation Bulletin IT-259R3, Exchanges of Property, which is published by the Department. I have attached a copy of this Interpretation Bulletin for information purposes.

Any changes to the rules governing replacement property would require a change in policy and an amendment to the Act. Since tax policy issues and amendments to the legislation are the responsibility of the Department of Finance, they would have to be considered by that Department. In this regard, I have forwarded a copy of our correspondence to the Honourable Paul Martin, Minister of Finance, for his consideration.

I trust that these comments will be of assistance.

Yours sincerely,

Herb Dhaliwal, P.C., M.P.

Attachment

C.C. The Honourable Paul Martin, P.C., M.P.

Minister of Finance
House of Commons
Ottawa, Ontario
KlA OA6

Minister's Office
Political Assistant

J. Gibbons
957-2135
November 3, 1998
982726