21 February 2000 External T.I. 1999-0015895 - SENIORS RESIDENCE-FORMER BUSINESS PROPERTY

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 Department.

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

Principal Issues: Whether a seniors' residence will qualify as a former business property.

Position: It depends on the facts.

Reasons: While the described operation of the seniors' residence may be compared to that of a hotel or motel, the determination of whether or not real property is used principally for the purpose of gaining or producing gross revenue can only be made following an actual review of all of the facts.

XXXXXXXXXX 	J. Gibbons
		1999-001589
Attention:  XXXXXXXXXX 

February 21, 2000

Dear XXXXXXXXXX:

We are replying to your letter of December 21, 1999, in which you requested our views concerning the replacement property rules in subsections 44(1) and 13(4) of the Income Tax Act. It seems that you wish to know how these rules apply to specific proposed transactions involving a "senior congregate care residence" (the "seniors' residence").

Since your situation appears to relate to actual proposed transactions, we refer you to our policy in Information Circular 70-6R3. Paragraph 22 of this circular explains that when a request for a technical interpretation relates to specific proposed transactions, an advance income tax ruling rather than a technical interpretation must be requested. Thus, we have provided general comments only on the situation outlined.

You describe a seniors' residence where the rents are nearly triple the rents charged by apartment buildings of comparable age and suite size, and that are in the same geographical area. You state that more than one-half of the difference relates to the special services that are provided to the seniors, which services are not typical of a regular apartment building. These services include all utilities, cable TV, daily meal service, weekly laundry and housekeeping services, and supervised daily recreation and activities. If a new seniors' residence (the "new property") is built to replace the existing seniors' residence, and the new property will provide similar services to its senior citizen residents, you request our views whether:

1. the seniors' residence will be considered a "former business property."

2. the new property will be considered a replacement property for the current seniors' residence.

3. the replacement property rules can be used to defer a capital gain and recapture arising from the disposition, to an arm's length party, of 50% of an undivided interest in a capital property that qualifies as a former business property.

4. the replacement property rules can be used to defer the capital gain and recapture arising from the disposition of 100% of an undivided interest in a capital property that qualifies as a former business property, where 50% of the undivided interest is disposed of to an arm's length party and 50% is disposed of to an non-arm's length party.

Our views

As you are aware, to qualify for the replacement property rules in section 44 of the Act, a voluntary disposition must be in respect of the disposition of a "former business property." According to the definition of former business property in subsection 248(1) of the Act, a former business property does not include rental property, which is defined for this purpose as real property owned by the taxpayer and used in the particular year principally for the purpose of gaining or producing gross revenue that is rent. As noted in your letter, IT-491, "Former Business Property," states that the operation of a hotel or motel is a business that provides services and the revenue generated is not gross revenue that is rent. While we are inclined to agree with your view that the described operation of the seniors' residence may be compared to that of a hotel or motel, the determination of whether or not real property is used principally for the purpose of gaining or producing gross revenue can only be made following an actual review of all of the facts.

You wish to know whether we will consider the new property to be a replacement property for the seniors' residence and what circumstances must be paramount in order to reasonably conclude that a property was acquired to replace a former business property. As stated above, we will only confirm the income tax treatment of a transaction if it is the subject of an advance ruling request. Accordingly, we refer you to our general comments in IT-259R3 concerning replacement property.

Your third question relates to whether the disposition of an undivided interest in a former business property qualifies for the replacement property rules. Since the definition of former business property includes an interest in real property, it is likely that an undivided interest in real property could qualify as a former business property under section 44. Whether it makes any difference if part of a taxpayer's undivided interest is disposed of to a non-arm's length party will depend on the particular facts. One important aspect is the test in paragraph (a) of the definition of replacement property in subsection 44(5). Since it must be reasonable to conclude that an acquired property is a replacement property for a former business property, a determination can only be made after reviewing the particular facts of a specific situation.

We trust that our comments will be of assistance.

Yours truly,

John Oulton
for Director
Business and Publications Division
Income Tax Rulings Directorate

??

- 3 -