21 June 1999 External T.I. 9911515 - 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: Can a corporate taxpayer who has disposed of a former business property that is farm land replace the property with shares of a qualified farm corporation that owns farm land and claim the deferral in subsection 44(1) of the Act?

Can a corporate taxpayer that has disposed of farm land that is a former business property obtain a replacement property by purchasing the shares of a qualified farm corporation and obtaining the farm property by winding-up the corporation pursuant to section 88 of the Act.

Position: No.

Yes

Reasons: The shares cannot be said to have been acquired for the purpose of gaining or producing income from the business carried on by the taxpayer as required in paragraph 44(5)(b) of the Act.

See paragraph 22 of IT-259R3.

XXXXXXXXXX 991151
J. E. Grisé
Attention: XXXXXXXXXX

June 17, 1999

Dear XXXXXXXXXX:

Re: Replacement Property

This is in reply to your letter of April 22, 1999 requesting our assistance in providing clarification relating to the definition of replacement property and comments set out in IT- 259R3, Exchanges of Property.

Your describe the following situation:

1. A corporate taxpayer wants to purchase “replacement property” within the time set out in subsection 44(1) of the Income Tax Act (the Act) in order to defer the capital gain on a farmland sale. We assume that the farmland was a “former business property” as defined in subsection 248(1) of the Act to the taxpayer.

2. A qualified family farm corporation (Farmco), referred to in section 110.6 of the Act, owns farmland.

3. The farmland owned by Farmco is similar to the farm land sold by the corporate taxpayer.

4. The shareholders of Farmco would like to sell the shares of Farmco rather than the farm land of the corporation in order to utilize the enhanced capital gains exemption.

Your first question is whether or not the shares of Farmco could be considered to be “replacement property” to the corporate taxpayer for the purposes of subsection 44(1) of the Act. In our view, the purchase of the shares of Farmco by the corporate taxpayer will not result in the shares being considered “replacement property” for the purposes of section 44(1) of the Act. The shares could not be said to have been acquired for the purpose of gaining or producing income from the business carried on by the corporate taxpayer as required in paragraph 44(5)(b) of the Act. The reference in paragraph 16(b) of IT-259R3 that shares of a cooperative corporation could constitute a replacement property does not apply to the replacement of a former business property. Furthermore, such shares of a cooperative corporation may provide for the same use or function as a property with a different physical description (e.g., a building) because of its attributes of entitling the shareholder to the right of inhabiting a particular real property.

Your second query is whether or not a “replacement property” is acquired if the corporate taxpayer purchases the shares of Farmco and winds-up Farmco pursuant to subsection 88(1) of the Act in order to obtain its farm land. As indicated in paragraph 22 of IT-259R3, since properties distributed to a parent by a subsidiary in a winding-up are deemed by paragraph 88(1)(a) of the Act to have been disposed of by the subsidiary and thus considered to have been acquired by the parent, a property acquired upon winding-up may serve as a replacement property for purposes of subsection 44(5) in respect of the disposition of a former property by the parent corporation (if all of the requirements of the relevant subsection are satisfied). It is a question of fact as to whether it is reasonable to conclude that an acquired property is a replacement property of a former property. The parent company’s cost of a replacement property acquired in such a manner would be determined pursuant to paragraph 88(1)(c) of the Act which would include, in appropriate circumstances, any “bump” provided by subsection 88(1)(d) of the Act.

We hope our comments are helpful.

Yours truly,

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