Colbert v. The Queen, 94 DTC 6620,  2 CTC 345 (FCTD)
Wetson J. found that the taxpayer had transferred all the assets and goodwill of his chicken farm with the exception of the land and the chicken quota, to a corporation, and that the non-salary income received by him from the corporation was rental income. Accordingly, the land retained by him did not qualify as a former business property.
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|Tax Topics - General Concepts - Agency||shareholder generally does not carry on business of corporation||138|
|Tax Topics - General Concepts - Personality||138|
|Tax Topics - General Concepts - Separate Existence||138|
The Queen v. Augart, 92 DTC 6610,  2 CTC 412 (FCTD)
Farm land which the taxpayer used for grazing animals (his own breeding stock as well as horses which he boarded for other people) was not a former business property of the taxpayer in light of the minimal revenues he derived from such activities.
Buonincontri v. The Queen, 85 DTC 5277,  1 CTC 370 (FCTD)
It was held that an 11 suite apartment building had been purchased by a tailor for the purpose of retaining it and renting it, and was accordingly a rental property given the ordinary meaning of the word "rent". In addition, the rental income earned was property income rather than business income. The building accordingly was not a former business property.
Gestions Calce Ltée v. Agence du revenu du Québec, 2019 QCCQ 7377
The ARQ assessed the taxpayer for recapture of depreciation and capital gain on the basis that a rental property that the taxpayer (“Gestions Calce”) had disposed of did not qualify as a “former business property” and thus did not qualify for deferral of such amounts under the Quebec equivalent (in Taxation Act, ss. 278 and 279) of the replacement property rules in ITA ss. 13(4) and 44. The property was rented by Gestions Calce to third parties and to a related person (“CR”) for use in CR’s business of reselling used Prévost buses. In so assessing, the ARQ relied on the lease to CR covering only 39.6% of the floor area of the building and (if regard were to be had to qualitative factors) the rents received from CR represented less than 25% of the total rents. Whether the property was a “former business property” turned on whether (under the definition thereof) it qualified as a “property … leased by the taxpayer to a person related to the taxpayer and used by that related person principally for any other purpose.”
Cameron JCQ found that the above “principally” test was satisfied in light inter alia of the following factors:
- Taking into account the use of the external spaces (i.e., for parking the buses) “CR effectively used more than 50% of the collective usable external and internal square feet” (para. 35, TaxInterpretations translation)
- “[B]eing the sole occupant for a large space versus numerous occupants of many small spaces, one can say, in qualitative terms, that the use of the immovable is principally for the sole occupant of greater importance, CR” (para. 36)
- There was an additional unwritten lease at sufferance of the interior spaces augmenting the portion of the interior spaces leased to more than 50%
- “The price stipulated for the lease was somewhat arbitrary, in the sense that the parties to the lease were related persons, and the lessor received, in addition, a substantial amount as management fees” (para. 39).
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|Tax Topics - Income Tax Act - Section 13 - Subsection 13(4)||departure from written terms of lease to find that a rental property was used principally in the active business of a related person||253|
Glaxo Wellcome Inc. v. The Queen, 96 DTC 1159,  1 CTC 2904 (TCC), aff'd 98 DTC 6638 (FCA)
The predecessor of the taxpayer bought an 18-acre parcel of land in 1965 with the intention of using it for an anticipated future expansion of its pharmaceutical business, and sold the parcel in 1988 (and bought a 62-acre site further to the west to meet his future expansion requirements) after realizing that the 18-acre site (which in the meantime had remained vacant) was inadequate for its expansion requirements.
In finding that the parcel did not qualify as a "former business property", Bowman TCJ. stated (at p. 1164) that:
"It was intended to be used, it was waiting to be used, but in any meaningful sense of the term it was not being used."
Re Trizec (1986), 28 DLR (4th) 161 (Man. C.A.)
"Land is not, in law, the soil we touch, but the rights attached to it. Such rights include the right to work the soil, to mine beneath the surface and build in the air space above it: the incorporeal rights to light, support and the use of water flowing across land." The appellant was liable for municipal assessment in respect of air rights which it occupied.
Meaning of "principally"
1.30 Where property is used in part to earn gross revenue that is rental income and in part to earn income from a business other than rental income, the principal use of the property is determined by the facts in the particular case. The word principally signifies mainly or chiefly and means more than 50%. Accordingly, one should look to the main or chief purpose or intent for which the owner uses the property. Although a pure quantum measurement may not necessarily be conclusive in every case, one of the prime factors to consider is the actual or physical proportion of the property used in the two income-earning processes. In addition, it may be necessary to consider other factors that are both relative and subjective. ...
Discounting of temporary property uses
1.31 If a property that would otherwise qualify as a former business property is rented for a short period prior to its disposition, it is a question of fact as to whether the renting was simply an interim measure while bona fide attempts were being made to sell the property. ...
1.32 Likewise, if the property remained idle for a period of time while attempts were made to sell it, the CRA would consider that the property was, immediately before the disposition, a former business property provided the property otherwise qualifies.
Voluntary disposition of Class 14.1 property generally not eligible for replacement property rules.
1.46 … One of the characteristics of a former business property is that the property is real or immovable property or an interest therein. Property included in Class 14.1 (such as a farm quota) is generally considered to be intangible property and, as such, will generally not be former business property.
Status of former business property to Amalco
1.52 Real or immovable property owned by one corporation and rented to another corporation becomes the property of the amalgamated corporation following the amalgamation of the two corporations. In this situation, if the amalgamated corporation uses the property primarily for the purpose of gaining or producing income from a business, it could qualify as former business property of the amalgamated corporation. This will be the case provided the property otherwise satisfies the requirements of the definition of former business property.
Property rented by partner to partnership business a former business property
1.54 A building owned by a taxpayer and rented to a partnership in which the taxpayer is a partner would normally qualify as a former business property if it is used by the partnership to earn business income as opposed to earning rent. While the income received from the partnership for leasing the property is classified as rent, the owner is also considered to be using the property for business purposes as a member of the partnership.
Use of rollover following s. 98(3) wind-up
1.55 Where a partnership is wound up, the partners may elect under subsection 98(3) to take an undivided interest, or for civil law an undivided right, in each property of the partnership. The undivided interests or the undivided rights may then be exchanged between the partners in order to permit a particular partner to become the sole owner of a particular property. This allows that partner to continue operating the business separately. Provided that the properties disposed of are interests in real property or rights in immovables that were used in the former partnership primarily to earn income from a business other than rent, they will qualify as former business properties.
The rollover in s. 14(6) for the acquisition of replacement eligible capital property following a voluntary disposition of ECP (e.g., of farm quota) is not being replaced. The somewhat equivalent provisions of ss. 13(4) and 44(1) only apply to former business properties, i.e., real property.
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|Tax Topics - Income Tax Act - Section 13 - Subsection 13(4)||rollover lost on transition from ECP to Class 14.1 property||140|
Insurance proceeds received for the destruction of part of a building (which, unlike the balance of the building, was used for business use) qualified as "compensation for property damaged" (para. (f) of the "proceeds of disposition" definition) rather than "compensation for property destroyed" (para. (c)), so that it was necessary for the destroyed property to qualify as a "former business property" in order for the replacement property rollover to potentially apply to the reinvestment of the insurance proceeds. CRA stated (TaxInterpretations translation):
[T]he portion of the building which was destroyed by fire was used in its totality to earn income from a business and therefore conformed with the definition of a former business property. If in the light of the damages to the building and the scale of the work to be effected it turns out that a new property is acquired by the taxpayer, section 44 can apply … .
See summary under s. 44(1).
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|Tax Topics - Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(f)||inclusion of insurance proceeds applied to building repair||116|
|Tax Topics - Income Tax Act - Section 44 - Subsection 44(1)||partial destruction of building||197|
|Tax Topics - Income Tax Act - Section 54 - Proceeds of Disposition - Paragraph (f)||insurance proceeds received for destruction of part of building: compensation for property damaged rather than destroyed||76|
Holdco, which leases properties for heavy industrial use to Opco (which is related) with the exception of some leasing of the properties to third parties, will sell the properties and purchase properties in another location within the required time limit for leasing to Opco for use in the same business. Ruling that the properties are former business properties.
"Notwithstanding the fact that a property owned by a corporation earns rental income that may be considered active business income, it is an excluded rental property for purposes of the definition of former business property."
An apartment building would be a rental property and, therefore, disqualified even if the taxpayer worked full-time at renovating and restoring it.
The replacement property rules in s. 44 may apply when freehold land is acquired to replace a leasehold interest in land for the purpose of carrying out the same or similar business, given that a leasehold interest in land qualifies as an interest in real property.
One partnership cannot be a "related person" to another partnership for purposes of the definition of a former business property.
Four properties which were acquired by a holding company at different times and held under four separate titles would be considered to be four properties rather than one property notwithstanding that they all were acquired for the purpose of use by an operating company related to the holding company. Accordingly, the primary use test would be applied to each of the four properties.
19 November 1991 Memorandum (Tax Window, No. 13, p. 12, ¶1599)
Vacant land held for the purposes of future expansion of a business does not meet the definition of former business property because it is not used for the purpose of gaining or producing income from a business.
7 October 1991 T.I. (Tax Window, No. 10, p. 11, ¶1502)
Where a corporation acquires real property as capital property for use in an active business and at some later juncture the real property is treated as inventory and is sold some years later, then although there is no disposition of the property at the time of its conversion from capital property to inventory, s. 44(1) has no application because at the time of the sale the property was not a former business property.
13 December 1989 T.I. (May 1990 Access Letter, ¶1214)
Buildings which were leased to a wholly-owned subsidiary or related corporation for use in manufacturing operations of those corporations did not qualify as former business properties.
88 C.R. - Q.47
The exclusion for rental properties applies where the land and buildings are held by a holding company and leased to Opco.