3 February 2011 External T.I. 2010-0391061E5 - Posting of security

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: Procedure for posting security

Position: General comments

Reasons: CRA's administrative position in IT259R4

XXXXXXXXXX
									2010-039106
									S. D'Angelo
									(613)952-5803

February 3, 2011

Dear XXXXXXXXXX :

Re: XXXXXXXXXX ("Aco")
Posting of Security

This is in response to your correspondence dated December 20, 2010, regarding arrangements to provide security for taxes payable for a taxation year in respect of a disposition of a former property in a situation where the replacement property rules will apply and the replacement property is acquired in a subsequent year.

The following is our understanding of the situation:

Aco, which has a XXXXXXXXXX year end, operated a hotel and lounge in XXXXXXXXXX Alberta. On XXXXXXXXXX , 2010 a fire at the hotel destroyed the entire building and contents (the "former property"). Aco agreed to a full settlement of the insurance amount to be received for the former property. Insurance proceeds were received before the end of the taxation year in which the former property was destroyed. The insurance proceeds resulted in a capital gain and recapture, which triggered a significant income tax liability for Aco's 2010 taxation year.

Aco expects completion of the construction of the replacement building in the 2011 taxation year and will be requesting a reassessment of its 2010 tax return, electing to have the provisions of subsections 44(1) and 13(4) of the Income Tax Act (the "Act") apply. The reassessment will reduce or eliminate the tax liability attributable to the disposition of the former property. You would like to make arrangements with the Canada Revenue Agency to provide security for the 2010 income tax liability arising as a result of the disposition of the former property until such time that the 2010 tax return is reassessed to give effect to the election to apply the replacement property rules under subsections 44(1) and 13(4).

Our Comments

The particular circumstances in your letter on which you have asked for our views appear to be a factual situation involving a specific taxpayer. As explained in Information Circular 70-6R5, 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 situations involving completed transactions, all relevant facts and documentation should be submitted to the appropriate tax services office ("TSO") for their views. However, we are prepared to offer the following general comments, which may be of assistance.

The replacement property rules in the Act permit a taxpayer to elect to defer the recognition of income or capital gains where a former property is involuntarily disposed of, or a former property that is a "former business property" (as defined in subsection 248(1) of the Act) is voluntarily disposed of, and a "replacement property" is acquired. To be considered a replacement property, a particular property must meet all the requirements outlined in the definition in subsections 13(4.1) (for the rules in subsection 13(4) for depreciable property) and 44(5) (for the rules in section 44 for capital property) of the Act.

The replacement property rules are discussed in Interpretation Bulletin IT-259R4, Exchange of Property.

Generally, a property is 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. In addition, the replacement property must be acquired and used for a use that is the same or similar to the use to which the former property was put (the "same or similar use test"). Furthermore, if the former property was used for the purpose of gaining or producing income from a business, the replacement property must be acquired for the purpose of gaining or producing income from the same or a similar business (the "same or similar business test").

Whether or not the conditions permitting the application of subsections 44(1) and 13(4) are met is a question of fact. If the conditions are met, Aco may elect to defer the recognition of income or capital gains where the former property destroyed in the fire is replaced with property that qualifies as replacement property.

You have indicated that in its tax return for the 2011 taxation year Aco will elect to apply the replacement property rules in subsections 13(4) and 44(1) and will request a reassessment of the 2010 corporate tax return to give effect to the election. This reassessment of the 2010 tax return will result in the reduction or elimination of the tax liability that arose from the disposition of the former property. Because of this, you are requesting the posting of security until such time that your request of the reassessment of the 2010 corporate tax return is processed.

We agree that if the conditions for the application of the replacement property rules referred to above are met, the reassessment of Aco's tax return for the 2010 taxation year will reduce or eliminate the tax payable for that year arising from the disposition of the former property, which was destroyed by fire.

The posting of security is addressed in paragraph 3 of IT259R4, which states the following:

"A taxpayer is required to report any recaptured capital cost allowance, taxable capital gain or amount determined under subsection 14(1) arising from the disposition of a former property in the year of disposition where the replacement property is acquired in a subsequent taxation year. However, provided a replacement property is acquired within the specified time limits, the taxpayer may request that the income tax return for the year of disposition of the former property be reassessed to generate a refund in respect of the income taxes paid on income arising on that disposition. In order to alleviate the financial burden that might ensue from this situation, acceptable security may be provided in lieu of payment of taxes owing until the time for the final determination of taxes is made or the time period for acquiring the replacement property has expired. Where this practice is followed, the full cost of providing such security is borne by the taxpayer and the interest on the unpaid taxes will continue to accrue at the appropriate prescribed rates subject to being reduced by interest credited on any subsequent reassessment giving effect to the deferral."

The arrangements to provide security are the responsibility of the local TSO. We have contacted and discussed your request for providing security with XXXXXXXXXX XXXXXXXXXX . Please contact XXXXXXXXXX in order to discuss arrangements for providing security with regard to Aco's situation.

We trust our comments will be of assistance.

Yours truly

S. Parnanzone
Manager
For Director
Business and Partnership Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

c.c.: XXXXXXXXXX