Principal Issues: [TaxInterpretations translation] 1. If a former property that is involuntarily disposed of is a secondary residence, can the acquisition of another secondary residence with different attributes be a replacement property under subsection 44(5) of the Income Tax Act?
2. Can the acquisition of an undivided interest in a secondary residence satisfy the conditions set out in subsection 44(5) of the Act?
3. If a transfer of an undivided interest in a personal residence occurs between spouses, what is the impact on the application of the replacement property rules?
Position: 1.Question of fact. Possibly.
2. An undivided interest in a secondary residence may, depending on the facts, be a replacement property pursuant to subsection 44(5).
3. The fact that a replacement property is acquired from a spouse does not, by that fact alone, preclude the application of the replacement property rules.
Reasons: Income Tax Act.
XXXXXXXXXX 2009-035222 Lucie Allaire, Advocate, CGA, D. Fisc. May 21, 2010
Dear Sir,
Subject: Qualification of a replacement property
This is in response to your email of December 14, 2009, in which you asked our opinion on the application of the replacement property rules to an involuntary disposition of personal-use property.
Unless otherwise indicated, all legislative references herein are to the provisions of the Income Tax Act (the "Act").
You referred to a government authority that expropriated from the owner (the "Taxpayer") real property that was a secondary residence of the Taxpayer. You stated that this secondary residence had been used solely for personal purposes, and therefore, would not at any time constitute rental property. You added that the disposition of this residence would not qualify for the principal residence exemption under paragraph 40(2)(b).
Your Questions
If the property being involuntarily disposed of is a secondary residence, you wish to know whether the acquisition of the following properties would engage the application of the replacement property rules in subsection 44(1), based on the criteria set out in subsection 44(5):
- Another second home in the same tourist region;
- Another second home in a different tourist region;
- A second home with different attributes (access to water);
- Acquisition of a personal residence in a metropolitan area.
You wish to know whether our conclusion would be the same if the Taxpayer acquired an undivided interest in these properties. Finally, you wish confirmation that our conclusion would remain the same if the replacement property was acquired from a spouse, whether or not the transfer was made pursuant to subsection 73(1).
Our Comments
It appears to us that the situation described in your letter and summarized below could constitute an actual situation involving taxpayers. As explained in Information Circular 70-6R5, it is not the practice of this Directorate to provide comments on proposed transactions involving specific taxpayers otherwise than in the form of an advance income tax ruling. If your situation involved specific taxpayers and one or more completed transactions, you should submit all relevant facts and documentation to the appropriate Tax Services Office for its opinion. However, we can offer the following general comments that may be helpful.
Subsection 44(1) generally provides that a taxpayer who realizes a capital gain on an involuntary disposition of a capital property (the "former property") may elect to defer tax on the capital gain to the extent that the taxpayer acquires a replacement property before the end of the second taxation year following the year in which subsection 44(2) deems the former property to have been disposed of and the proceeds to have become receivable. Generally, where a taxpayer makes the election, no capital gain will be realized to the extent that the cost of the replacement property is equal to or greater than the proceeds of disposition of the former property.
It is necessary that the property that replaces the former property be a "replacement property" pursuant to subsection 44(5). In this regard, the definition of "property" in subsection 248(1) may include an undivided co-ownership interest in an immovable.
In this case, a property will be a replacement property for the former property (the secondary residence), if each of the following applicable conditions are satisfied:
(1) it must be reasonable to conclude that the taxpayer acquired the property to replace the former property;
(2) the taxpayer must acquire the property and the taxpayer, or a person related to the taxpayer, must use it in the same or similar manner as the former property;
(3) where the former property was taxable Canadian property, the particular depreciable property or capital property is also a taxable Canadian property of the taxpayer;
(4) where the former property was taxable Canadian property of the taxpayer that is not a treaty-protected property, the particular depreciable property or capital property is also taxable Canadian property of the taxpayer that is not a treaty-protected property; and
First, there must be some correlation (or a direct substitution) between the disposition of a former property and the acquisition of the replacement property. The two properties must generally have the same physical characteristics. For this purpose, a secondary residence consisting of a building and land, which would be a personal-use property and thus, for tax purposes, one and the same property, could be replaced by a new property, which would also consist of a building and land, and which would be considered as a single replacement property.
However, there may be situations where a different type of property is used for the same purpose as the former property. If, for example, a taxpayer acquires a share of the capital stock of a co-operative housing corporation acquired for the sole purpose of living in a housing unit, it is possible that this share of the capital stock could be a replacement property.
Second, the replacement property must have been acquired for the same or similar use as the former property. If the former property is a secondary residence, this requirement could be satisfied if the new property qualifies as personal-use property and is not used to generate income. For example, a former property cannot be replaced by a rental property.
The geographic location of the "replacement property" is generally not a determining factor, unless it is a question of whether the replacement property is, as was the former property, taxable Canadian property. Under the definition of "taxable Canadian property" in subsection 248(1), real property must be situated in Canada in order to qualify as a taxable Canadian property.
While the determination as to a replacement property remains essentially a question of fact, it is our view that a secondary residence, whether or not it is in the same tourist area as the former property or has different attributes (access to water) or is a personal residence in a metropolitan area - or an undivided interest in such properties - could qualify as a replacement property for a secondary residence. Of course, such replacement properties must qualify as personal-use and as capital property pursuant to section 54.
Furthermore, the fact that a replacement property is acquired by a taxpayer from the taxpayer’s spouse--whether or not subsection 73(1) applies--does not, by that fact alone, preclude the application of the rules in subsection 44(1). However, in the absence of a detailed factual situation, we will refrain from making additional comments.
Best regards,
François Bordeleau, Advocate
Manager
Business and Partnerships Section
Income Tax Rulings Directorate.