Principal Issues: [TaxInterpretations translation] Can the replacement property rules apply to a rental property acquired by a taxpayer to replace a parking lot from which the taxpayer generated rental income, and was expropriated?
Position: No.
Reasons: For the purposes of 44(5)(a.1), the replacement property should generally have the same physical characteristics as the former property.
XXXXXXXXXX 2010-035495 I. Landry, M. Fisc. June 2, 2010
Dear Sir,
Subject: Replacement property - involuntary disposition
This is in response to your email of January 21, 2010, in which you requested our comments on the application of subsections 13(4) and 44(1) of the Income Tax Act (the "Act").
Specifically, you asked whether a rental property acquired by a taxpayer to replace a parking lot from which the taxpayer derived rental income would qualify as a "replacement property" under subsections 13(4.1) and 44(5). You further indicated that the immovable in question was acquired by the taxpayer as a result of the expropriation of the taxpayer’s parking lot.
Unless otherwise indicated, all legislative references herein are to the provisions of the Act.
The situation described in your email appears to be related to a completed transaction of a specific taxpayer. When it comes to determining whether a completed transaction has received appropriate tax treatment, that determination is made first by our Tax Services Offices as a result of their review of all facts and documents, which is usually performed as part of an audit engagement. However, we can offer the following general comments that we hope may be helpful to you. These comments, however, may not apply to your particular situation in certain circumstances.
The general position of the Canada Revenue Agency ("CRA") regarding exchanges of property is set out in Interpretation Bulletin IT-259R4 - Exchange of Property. This interpretation bulletin is available on the CRA's website at http://www.cra-arc.gc.ca/E/pub/tp/it259r4/it259r4-e.html.
Among the conditions that must be satisfied under subsection 44(5) (or comparable conditions under subsection 13(4.1)) in order for a property to be considered a replacement property is the condition in paragraph 44(5)(a.1) that the capital property was acquired by the taxpayer and used by the taxpayer for a use that is the same as or similar to the use to which the taxpayer put the former property.
We are generally of the view that in order to satisfy the condition in paragraph 44(5)(a.1), the replacement property should have the same physical characteristics as the former property. Since a building does not have the same physical characteristics as a parking lot, it is our view that the building in the situation described does not satisfy the condition in paragraph 44(5)(a.1) even though both the parking lot and the building generate rental income. Consequently, the rental property in this situation cannot be considered a replacement property within the meaning of subsection 44(5) or subsection 13(4.1).
We hope that you will find our comments helpful.
Best regards,
Randy Hewlett
Manager
for the Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.