21 January 1999 External T.I. 9832265 - REPLACEMENT PROPERTY

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:

1) Is farm property purchased outside Canada eligible as replacement property?

2) If the farmer moves to a foreign country, is he still eligible to have replacement property in Canada /

Position:

1) No

2) No, unless a related person uses the replacement property in the same manner as the former business property

Reasons:

1) 44(5)(c)

2)44(5)(b) and par 14(b) of IT 259R3

XXXXXXXXXX 983226
C. Tremblay
January 21, 1999

Dear XXXXXXXXXX:

Re: Replacement Property

This is in reply to your letter of November 13, 1998, requesting our comments with respect to the following situation.

You describe a situation where a dairy farmer sold his farm, realized a significant gain and considers purchasing a replacement property. In your first question, you ask whether the farmer can purchase such property outside Canada and use the replacement property rules in section 44 of the Income Tax Act (the “Act”) to defer recognition of any capital gain. In your second question, should the farmer purchase replacement property in Canada and decide to move to another country to pursue farming activities in that country, you ask about the income tax implications in regard to the replacement property in Canada, since he will not be actively farming in Canada.

Our Comments

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 income tax ruling request submitted in the manner set out in Information Circular 70-6R3. The following comments are therefore, of a general nature only, and are not binding on the Department.

In response to your first question, property acquired in replacement of the former property would have to be situated in Canada, pursuant to the requirements of paragraph 44(5)(c) of the Act.

In answer to your second question, paragraph 44(5)(b) of the Act requires that the replacement property be used by either the taxpayer or a person related to the taxpayer to gain or produce income from the same or similar business as the business in which the former property was used. Accordingly, the taxpayer will not be able to use the replacement property rules unless a person related to the taxpayer uses the replacement property located in Canada in the same or similar business.

Paragraph 9 to 21 of Interpretation Bulletin IT-259R3, Exchanges of Property, further discuss the replacement property rules. A copy is enclosed for your review.

We trust the above comments are of assistance.

Yours truly,

J. F. Oulton, CA
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

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