27 May 1999 Ministerial Correspondence 9907374 - SIZE OF 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: Whether the size of a property affects the determination of whether it qualifies as a replacement property for purposes of section 44.

Position: The Department’s general position is that the replacement property rules do not allow a property that is significantly larger than property it replaces. However, the Department recognizes that whether a property is a replacement property is a factual determination which must take into account factors other than size.

Reasons: According to the definition of replacement property, a property will only qualify as a replacement property if it is reasonable to conclude that it was acquired to replace the former business property.

XXXXXXXXXX

Dear XXXXXXXXXX:

Mr. Rob Wright, Deputy Minister of National Revenue, has asked me to respond to your letter of February 8, 1999, regarding the replacement property rules in section 44 of the Income Tax Act.

In your letter, you noted certain concerns with the Department's position on business expansion and the replacement property rules expressed by the Income Tax Rulings and Interpretations Directorate. Your view is that section 44:

• was specifically intended to encourage and promote business expansions by permitting companies which were located in older premises to sell those premises and acquire new plants at sites which they could modernize and expand;
• is intended to promote the growth of business through the exchange of older, outgrown business properties for what you referred to as greenfield or new locations; and
• permits the exchange of high business land values for lower land values and more building by its operation.

As you are aware, the replacement property provisions in the Act permit a taxpayer to defer recognition of a capital gain if the taxpayer reinvests the proceeds of disposition in a replacement property within a certain period of time. Under these provisions, a property will 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 added by Bill C-28 and is effective for dispositions occurring after 1993. The Department's view is 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.

On the basis that the acquisition of a replacement property must be connected causally to the' disposition of a former business property, the Department has opined that section 44 is not intended to encompass business expansions. In this regard, paragraph 15 of the attached Interpretation Bulletin IT-259R3, Exchanges of Property, describes the situation of a taxpayer who has a number of retail locations, some of which are in the process of commencing operations while others are scheduled for closing. A new location probably would not be considered a replacement property for an old location if the business operations at the two locations are carried on simultaneously, other than for a brief transitional period.

The Department has also taken the general position that the replacement property rules do not allow the acquisition of a property that is significantly larger than the property it replaces. For example, the Income Tax Rulings and Interpretations Directorate has previously given a general interpretation that the purchase of a 3,000-acre farm would not likely be considered a replacement property for a 200-acre farm. However, the Department recognizes that whether a property is a replacement property is a factual determination which must take into account factors other than size.

The Department recognizes that section 44 may, depending on the circumstances, apply when a corporation undertakes to improve its business through the exchange of an older, outgrown business property for a more spacious location where land values are lower. For example, a well-established retailer might decide to join the growing trend for warehouse-style retailing and exchange its cramped quarters for a new, more spacious store. In this situation, the new property will likely qualify as replacement property even though it may have significantly more square-footage than the former business property.

I trust these comments will be of assistance.

Yours sincerely,

Bill McCloskey
Assistant Deputy Minister
Policy and Legislation Branch

Attachment

J.Gibbons
957-2135
April 22,1999