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: Can the replacement property rules be claimed in respect of the disposition of a building rented to a controlled corp?
Position: Unable to opine.
Reasons: Question of fact whether or not conditions or tests met.
XXXXXXXXXX
2010-037424
James Atkinson, CGA
(519) 457-4832
September 1, 2010
Dear XXXXXXXXXX :
Re: Replacement Property Rules
This is in response to your email dated July 8, 2010 and further to our telephone conversation of July 16, 2010 (Atkinson/XXXXXXXXXX ) concerning the replacement property rules.
You described a situation involving an individual (Mr. A) who owned real property consisting of land and a building (the "Former Building"). The Former Building was rented to, and used in the business of, a corporation (Aco) of which Mr. A is the sole shareholder. Aco is in the business of hauling goods and used the Former Building for the repair and maintenance of trucks owned by the corporation. Other rent was earned by Mr. A, in respect of the Former Building, paid by arm's length tenants. While it is known that the amount of rent from one of the arm's length tenants accounts for about one third of the total annual rents earned by Mr. A, there is no information regarding the amount of rent earned by Mr. A from the other arm's length tenant(s).
Mr. A sold the real property consisting of the land and the Former Building in 2010 and has since constructed a new replacement building (the "Replacement Building") on land that he concurrently owned. The Replacement Building is intended to be used by Aco for the repair and maintenance of trucks owned by the corporation. No amount of capital cost allowance was ever claimed by Mr. A in respect of the Former Building.
You have requested an opinion as to whether Mr. A may defer any capital gain arising on the disposition of the Former Building pursuant to the replacement property rules found in section 44 of the Income Tax Act ("Act") on the basis that the Replacement Building qualifies as a replacement property, within the meaning set out in subsection 44(5) of the Act, for the Former Building.
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 for their views. However, we are prepared to offer the following general comments, which may be of assistance.
The conditions necessary to qualify for a deferral of the recognition of capital gains where a "former property" that is a "former business property" is voluntarily disposed of, and a "replacement property" is acquired, are discussed in IT-259R4 - Exchanges of Property, available on the CRA website at www.cra-arc.gc.ca.
Subsection 44(1) of Act permits a taxpayer to elect to defer the recognition of capital gains where a "former business property" is voluntarily disposed of, and a "replacement property" is acquired. Former business property is defined in subsection 248(1) of the Act as meaning, generally, real property or an interest therein that is used primarily for the purpose of earning income from a business and excludes a rental property. Rental property is in turn defined for the purposes of the definition of former business property as meaning, generally, real property used principally for the purpose of earning gross revenue that is rent; however, if the property is leased by the taxpayer to a person related to the taxpayer and is used by that related person principally for any purpose other than gaining or producing gross revenue that is rent, it is not included in the definition of rental property.
Whether or not a property is used to earn gross revenue that is rental income and whether or not it is leased, but only in part, to a related person that uses the property principally for any purpose other than gaining or producing gross revenue that is rent, are questions of fact that must be resolved on the basis of the documents and circumstances in the particular case. The word "principally" is considered to mean "mainly" or "chiefly" and, accordingly, one should look to the main or chief purpose or intent for which the property is used by the owner.
Where the property is former business property and the disposition is voluntary, subsection 44(1) provides that the replacement property must be acquired within one year of the end of the taxation year in which the disposition occurred.
To be considered a replacement property, a particular property must meet all the requirements outlined in the definition in subsection 44(5) of the Act. 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. Furthermore, the replacement property must be acquired for the purpose of gaining or producing income from the same or a similar business.
A taxpayer must elect to have the provisions of subsections 44(1) and 13(4) of the Act apply. Generally, a taxpayer is required to report any taxable capital gain arising from the disposition of a former property in the year of disposition. However, where the disposition and replacement take place in the same year, a taxpayer's calculation (in the income tax return for that year) of the capital gain by virtue of subsection 44(1) will be considered to constitute an election.
We are unable to offer an opinion on whether the Replacement Building qualifies as replacement property for the Former Building particularly since the information regarding the amount of rents earned by Mr. A from related persons and unrelated persons is insufficient to establish, based on the primary use of the Former Building, whether the Former Building constitutes a rental property for purposes of the definition of former business property. Since the situation you have described involves a completed transaction, you may wish to contact the local tax services office for an opinion.
We trust that these comments will be 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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