14 September 2010 External T.I. 2010-0378261E5 - Expropriation

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.

Principal Issues: Does the acquisition of a rental property for an infrastructure project qualify for the capital gain deferral under the replacement property rules in Section 44.

Position: A question of fact but probably yes.

Reasons: Taxpayer has received notification of intention to take property under statutory authority.

September 14, 2010

Dear XXXXXXXXXX :

Re: Expropriation

I am writing in reply to your letter dated May 31, 2010, in which you asked whether the purchase of a rental property by XXXXXXXXXX would be considered to be an expropriation and consequently, whether the recognition of a capital gain on the disposal could be deferred if, before the end of the second taxation year following the initial year, a capital property is acquired that is a replacement property for the former property.

The particular situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. Written confirmation of the tax implications inherent in particular transactions is 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 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. We are, however, prepared to offer the following general comments, which may be of assistance.

All statutory references in this letter are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended.

Section 44 allows a taxpayer to defer the recognition of a capital gain when an amount has become receivable as proceeds from an involuntary disposition of property (for example, theft, destruction or expropriation) or in respect of the disposition of a former business property of the taxpayer.

In the case of an involuntary disposition, a qualifying disposition of property occurs when the proceeds of disposition received is compensation for property taken under statutory authority or the sale price of property sold to a person by whom notice of an intention to take it under statutory authority was given.

In this case you have indicated that the property is going to be purchased by the XXXXXXXXXX because the XXXXXXXXXX needs to acquire the property rights for your rental property in order to construct a XXXXXXXXXX . While it seems probable, we can not tell with certainty from the letter provided whether the property is being acquired under statutory authority or expresses an intention to take the property under statutory authority. If neither of these criteria is met, then the disposition would not qualify for the capital gain deferral since rental properties only qualify if they are disposed of involuntarily. This issue would need to be clarified by the acquiring XXXXXXXXXX .

While ultimately a question of fact depending on all of the surrounding facts and circumstances, if this is a disposition of property which qualifies under the replacement property rules, you would have up to two years to acquire a replacement property. It should be noted that in order to qualify for a full deferral of the capital gain resulting from the disposition, the entire proceeds would have to be used to acquire a replacement property, i.e., if the proceeds of disposition from the former property exceed the cost of the replacement property there would be a gain on disposal.

In an expropriation, it is possible that an owner may be compensated or reimbursed with regard to matters in addition to the market value of the expropriated property. For example, compensation may include amounts in respect of compensation for loss of goodwill of a business, loss of rental revenue, or interest. Generally, compensation in respect of an income (rather than a capital) item is not deferred but should be included in the recipient's income in the ordinary manner.

Generally, a particular property would only be considered a replacement property if it is acquired to replace the former property and there is a causal relationship between its acquisition and the disposition of the former property; the particular property is acquired and used for a use that is the same or similar to the use to which the former was put; and, where the former property was a taxable Canadian property, the particular depreciable or capital property is also a taxable Canadian property.

For complete information on the replacement property rules, please see Interpretation Bulletin IT-259R4 Exchange of Property which is available on the Canada Revenue Agency Web site at http://www.cra-arc.gc.ca/E/pub/tp/it259r4/README.html.

We trust that these comments will be of assistance.

Yours truly,

Randy Hewlett
Manager
for Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch