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: Whether a voluntary disposition of a particular property can qualify as a "former business property" (defined in subsection 248(1)).
Position: Likely no in this case.
Reasons: The property is used by a taxpayer principally for the purpose of gaining or producing gross revenue that is rent.
XXXXXXXXXX
2010-039119
Kathryn McCarthy, CA
(613) 828-9377
February 15, 2011
Dear XXXXXXXXXX :
Re: Replacement Property
This is in response to your letter of October 15, 2010, concerning the above noted subject.
You described a client which owns a commercial retail property that is used to earn rental income. The property includes a two story building with a footprint of 4,500 square feet and a total area of 9,955 square feet. It was the intention of your client to build four stories above the building to add 14 - 16 apartments. Unfortunately, the municipal zoning was changed to disallow any residential development. Since the potential revenue for the property is now limited, your client intends to sell the property ("former property") and acquire a new property as replacement for development purposes.
Your client would like to elect to use the replacement property rules in subsections 44(1) and 13(4) of the Income Tax Act ("Act") in order to defer the recognition of income and capital gains on the sale of the former property. Since the disposition of the former property is voluntary, the replacement property rules would apply only if the former property meets the definition of "former business property" in subsection 248(1) of the Act. Consequently, you have enquired whether the former property qualifies as a former business property such that your client is eligible for the replacement property rules under the Act.
Our Comments
The situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular IC 70-6R5, Advanced Income Tax Rulings, dated May 17, 2002. This IC and other Canada Revenue Agency ("CRA") publications can be accessed on the Internet at www.cra-arc.gc.ca. Should the situation involve a specific taxpayer and a transaction that has already been completed, you should submit all relevant facts and documentation to the appropriate Tax Services Office ("TSO") for their views. A list of TSOs is available on the "Contact Us" page of the CRA website. However, we are prepared to provide the following general comments, which may be of assistance.
In a situation where a taxpayer voluntarily disposes of a former property, the replacement property rules in subsections 13(4) and 44(1) of the Act permit the taxpayer to elect to defer the recognition of income or capital gains where the former property qualifies as a former business property and a replacement property is acquired. Whether or not a particular property can be considered a former business property is a question of fact. For information regarding the meaning of former business property and the replacement property rules, please refer to Interpretation Bulletins IT-491, Former Business Property, and IT-259R4, Exchange of Property, which are available on the Internet on the CRA website.
"Former business property" in respect of a taxpayer is defined in subsection 248(1) of the Act (as proposed to be amended) to mean:
"...a capital property of the taxpayer that was used by the taxpayer or a person related to the taxpayer primarily for the purpose of gaining or producing income from a business, and that was real or immovable property of the taxpayer, an interest of the taxpayer in real property, a right of the taxpayer in an immovable or a property that is the subject of a valid election under subsection 13(4.2), but does not include:
a) a rental property of the taxpayer,
b) land subjacent to a rental property of the taxpayer, or
c) land contiguous to land referred to in paragraph (b) that is a parking area, driveway, yard or garden or that is otherwise necessary for the use of the rental property referred to therein, or
d) a leasehold interest in any property described in paragraphs (a) to (c)..."
Generally, "rental property" is real or immovable property owned by the taxpayer and used in the taxation year in respect of which the expression is being applied principally for the purpose of gaining or producing gross revenue that is rent. Accordingly, a property would be disqualified as a former business property if it was used in the taxation year in which it was disposed of principally for the purpose of producing rent. However, "rental property" does not include a property leased by the taxpayer to a person related to the taxpayer and used by that related person principally for any purpose other than gaining or producing gross revenue that is rent.
The renting of real property is generally not, in and of itself, a business. Generally, whether or not it is a business depends on the number and kinds of basic and additional services supplied and not on the size or number of properties being rented. For further information on how to determine whether the rental of a particular property may be regarded as a business by the CRA, please consult paragraphs 4 - 7 of Interpretation Bulletins IT-434R, Rental of Real Property by Individual, and IT-434SR, Rental of Real Property by Individual, which are available at www.cra-arc.gc.ca/menu/ITSC_400-e.html.
Based on the facts, the property in the situation you describe appears to be used for the purpose of earning rental income and not for the purpose of earning income from a business. Consequently, it would not qualify as a former business property for purposes of the replacement property rules in subsections 13(4) and 44(1) of the Act.
We trust the foregoing comments are of assistance.
Yours truly,
S. Parnanzone
Manager
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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