17 June 1999 Ministerial Correspondence 9908574 - REPLACEMENT PROPERTY - LARGER 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.

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Dear XXXXXXXXXX:

In his letter of March 16, 1999, the Honourable Lyle Vanclief, Minister of Agriculture and Agri-Food, has asked me to provide you with clarification on the rules in the Income Tax Act concerning replacement property.

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I am, therefore, writing to offer clarification on these issues. I note from Mr. Vancliefs most recent letter to me, that he is especially concerned with the size of the land base as the only criterion for farmers in determining whether or not a particular property is a replacement property.

In general terms, 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. In order for a property to qualify as a replacement property, it must be 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 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 to the disposition of a former business property, the Department has given the opinion that the replacement property rules are 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. The bulletin states that 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 likely not be considered a replacement property for a 200-acre farm. then there are no other aspects to consider, such a vast change in size gives the impression that the acquisition was more than a replacement. A similar interpretation could be given if the floor space of a new building was substantially greater than the one being replaced. However, I would emphasize that, in order to make a definitive determination in an actual case, all other factors would have to be considered in order to determine if the replacement property rules are applicable.

Should you or your staff require further information on this issue, I invite them to contact Mr. John Oulton, Section Manager in the Income Tax Rulings and Interpretations Directorate. Mr. Oulton can be reached by telephoning 1-613-957-2141, or by writing to 25 Nicholas Street, Ottawa, Ontario K1A OLS. He is aware of our correspondence and will be pleased to be of assistance.

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I trust my comments have been helpful

Yours sincerely,

Herb Dhaliwal, P.C, M.P.

Attachment

J.Gibbons
957-2135
April 27, 1999
990857