13 October 2000 External T.I. 2000-0034715 - REPLACEMENT PROPERTY FARM LAND

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 acquisition of 1,400 acres of farm land can qualify as replacement property for the disposition of 210 acres of land, and the termination of a lease on another 1,200 acres

Position: Question of fact

Reasons: A review of all relevant facts is required

XXXXXXXXXX 	2000-003471
		Wayne Antle
October 13, 2000

Dear XXXXXXXXXX:

Re: Farm Land - Replacement Property

We are replying to your letter of June 21, 2000, in which you requested our comments regarding the replacement property rules in section 44 of the Income Tax Act (the Act'). More specifically, you inquire whether the purchase of between 1,280 and 1,440 acres of farm land would qualify as replacement property for the disposition of 210 acres of land, and the termination of a lease covering an additional 1,200 acres.

The scenario presented may be summarized as follows:

An individual owns one 80-acre parcel of land, and has a 50% undivided interest in an adjacent 80-acre parcel. The remaining interest in the second parcel is owned by the individual's two siblings. Another adjacent 50-acre parcel of land is owned by the individual's father. All three parcels were farmed by various generations of the family over the past 80 years. The individual leases an additional 1,200 acres of land, close to the three family-owned parcels, from a third party. He currently uses the leased land, and the three parcels, (1,400 acres in total) in a farming business.

The family members have been approached by developers offering to purchase the land. The proceeds could be used to purchase between 1,280 and 1,440 acres further from the city. You question whether this land can be considered replacement property for the three parcels sold, if the lease is terminated on the other 1,200 acres of land.

Our comments

Since your situation seems to relate to an actual proposed transaction, we refer you to our policy in this regard, which is set out in Information Circular 70-6R3. This circular explains that it is our policy not to provide written confirmation of the tax implications inherent in particular transactions unless the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in IC 70-6R3. Nonetheless, we have provided some general comments

In order for property to be considered replacement property, paragraph 44(5)(a) of the Act provides that it must be reasonable to conclude that the property was acquired as a replacement for the former property. The Agency has taken the view that the replacement property rules, generally, do not apply to the acquisition of a property that is significantly larger than the property it replaces. Furthermore, as stated in paragraph 15 of IT-259R3, there must be a specific correlation between the disposition of the former property and the acquisition of the replacement property. Accordingly, the words replacement property contemplate a direct substitution, such that there is a causal relationship between the disposition of the former property and the acquisition of the replacement property.

It is also our general view that the replacement property rules in section 44 may apply when land is acquired to replace a leasehold interest in land for the purpose of carrying out the same or similar business. This is based on our understanding that a leasehold interest in land is an interest in real property pursuant to the definition of former business property in subsection 248(1) of the Act.

In order to determine whether the replacement property rules will apply to the situation presented, we would need to review all of the facts and associated documentation, including the sale agreements on the disposition of the old land, the purchase documents on the acquisition of the new land, and the agreement covering the leased land. Such a review would only be undertaken in the context of an advance ruling request.

We trust that our comments will be of assistance.

Yours truly

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