8 November 2002 External T.I. 2002-0159465 - CTF BUSINESS 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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: 2002 Canadian Tax Foundation Q & A regarding the Exchange of Property Rules and Business Expansions.

Position: See below.

Reasons: See below.

We understand that the CCRA has received a number of inquiries on how the replacement property rules are affected by business expansions. The inquires have arisen because of the statement in paragraph 15 of Interpretation Bulletin IT-259R3, Exchanges of Property, that the replacement property rules are not intended to encompass business expansions.

We have further considered the comments on business expansion in the bulletin since that term is not specifically used in the law. For example, we have been asked to consider whether a farmer could use the replacement property rules on the voluntary disposition of real property when the existing farmland is replaced with a substantially larger piece of land. Reasons for selling the existing farmland could include its proximity to an urban area where the land is very valuable compared to a more remote area. If existing farmland is replaced with a larger farm, the question arises as to whether the new farmland could be considered a replacement property, or be regarded as a business expansion and therefore, excluded by virtue of our position in the bulletin.

Question 1

Could you briefly explain the basis for the concern about the use of the replacement property rules in relation to business expansions?

Response 1

In general terms, the replacement property rules in the Income Tax Act require that it be reasonable to conclude that a new property will be acquired to replace a former property. As such, there must be a correlation or causal relationship between the acquisition of the new property and the disposition of the former property.

Question 2

In light of this particular requirement in the law, could you expand on the bulletin position as it relates to business expansions?

Response 2

The statement in paragraph 15, that the replacement property rules are not intended to encompass business expansions was made in the situation where it could not be readily determined whether one particular property is actually being replaced by another. Hence, it is important to consider the example given. The comments were made in the context of a taxpayer who was in the process of expanding a retail operation by opening and closing a number of locations. The new properties acquired during this type of "business expansion" were not considered replacement properties because there was no correlation or causal relationship between their acquisition and the disposition of the existing properties.

Question 3

Are there any other important considerations when a particular property is purchased under a business expansion?

Response 3

Transactions surrounding these cases are often not straightforward and have peculiarities that are specific to a taxpayer's business. A determination of whether a newly acquired property can reasonably be considered a replacement property under these rules can only be made after considering all the facts and circumstances surrounding a particular situation.

In conclusion, it is difficult to envision all situations where property purchased under a business expansion will not qualify as a replacement property. However, the example given in the bulletin can be a useful guide. I would therefore like to point out that the fact that a property is purchased under a business expansion will not, in and by itself, mean that the property cannot be considered a replacement property.

Question 4

Will IT-259R3 be changed to clarify the comments on business expansion?

Response 4

The bulletin will be amended to clarify that the emphasis will be placed on whether a correlation or causal relationship exists between the acquisition of the new property and the disposition of the existing property when determining if a particular property is a replacement property, and not simply on the fact that the new property is acquired because of a business expansion.

Question 5

Can a taxpayer get certainty on the tax implications when contemplating the purchase of a replacement property?

Response 5

As discussed in Information Circular IC 70-6R5, Advance Income Tax Rulings, we provide an advance income tax ruling service to promote voluntary compliance, uniformity and self-assessment by providing certainty with respect to the income tax implications of proposed transactions. In fact, we have issued rulings in the past involving the application of the replacement property rules to a business expansion. Therefore, provided all the facts are presented in the ruling request in accordance with the procedure outline in the circular, we will consider a request for an advance income tax ruling on proposed transactions involving the replacement property rules in a business expansion.

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