1 September 1999 Ministerial Letter 9918478 - REPLACEMENT PROPERTY - EXPANSIONS

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 our position in IT-259R3 that section 44 of the Act is not intended to encompass business expansions is correct.

Position: The example of a "business expansion" in IT-259R3 is that of a taxpayer opening and closing stores. In our view, this type of situation does not qualify for replacement property treatment under the Act. Nonetheless, it is recognized that there are other situations, which some might consider business expansions, that will qualify under the replacement property rules. Since it is a question of fact, a determination can only be made following a review of all of the facts and circumstances.

Reasons: This position is based on the test in the law that it must be reasonable to conclude that a particular property was acquired by a taxpayer to replace a former property.

September 1, 1999

XXXXXXXXXX

Dear XXXXXXXXXX:

Thank you for your letter of June 8, 1999, concerning my response to you of May 27, 1999.

In your letter, you state that you are still concerned about the Department's position that section 44 of the Income Tax Act is not intended to encompass business expansions, and that it is a factual determination that is always required in these situations. As noted in my earlier letter, the main reason why it remains a question of fact whether a replacement property has been acquired is because of the test in the law that it must be reasonable to conclude that a particular property was acquired by a taxpayer to replace a former property. In the Department's view, the example in Interpretation Bulletin IT-259R3 of a taxpayer opening and closing stores is a likely situation where this test would not be met. It is within this context that the statement is made in paragraph 15 that the replacement property rules are not intended to encompass business expansions. Nonetheless, it is recognized that other situations, which some might consider business expansions, will qualify under the replacement property rules. For instance, in my letter of May 27, I gave the example of a retailer exchanging cramped store quarters for a new, more spacious store. In this situation, I stated that the new property will likely qualify as a replacement property even though it may have significantly more square-footage than the former business property.

I have noted your hand-written comments about two actual situations that you are aware of in which the application of the replacement property rules may be less than certain. The first situation involves the replacement of a 35-acre orchard with a 100-acre cattle and hay. farm. insofar as the other situation is concerned, you have only indicated that a group of subcontract manufacturers will be moving when a large truck assembler moves to a new location next year. Presumably, the truck assembler is a major client of the subcontractors, and they are moving to remain close to it. Although departmental officials would have to examine all of the surrounding facts, there is no evidence of a conflict with the bulletin comments on business expansions in these types of situations.

I agree with you that it may be difficult in some circumstances to advise your clients on the application of the replacement property rules under section 44. However, if your clients would like to have certainty from the Department on a proposed transaction, I invite you to request an advance income tax ruling in the manner outlined in Information Circular 70-6R3, dated December 30, 1996.

I trust my comments are of assistance.

Yours sincerely,

Bill McCloskey
Assistant Deputy Minister
Policy and Legislation Branch

J. Gibbons
(819) 458-1197
July 30, 1999