Principal Issues: [TaxInterpretations translation] In the context of an application for partition under the Civil Code of Québec, can two taxpayers rely on the replacement property rules on the basis that the proceeds of disposition they receive fall within paragraph (d) of the definition of "proceeds of disposition" in section 54 and subsection 13(21) of the Income Tax Act?
Position: No.
Reasons: We do not believe that an application for partition gives rise to a right to compensation for the property taken under statutory authority, nor to an amount of the sale price of the property sold to a person who has given notice of an intention to take it under statutory authority.
2007-023183 XXXXXXXXXX François Bordeleau, Advocate March 5, 2008
Dear Madam,
Subject: Property rollover under the Income Tax Act (the "Act")
This is further to your request of April 12, 2007 for the opinion of the Canada Revenue Agency ("CRA") on the application of subsections 44(1) and 13(4).
Unless otherwise indicated, all statutory references herein are to the provisions of the Act.
You referred to a situation where Mr. A and Mr. B are undivided co-owners of two rental properties of approximately equal value that are not used in a business. Mr. A and Mr. B wish to terminate the undivided ownership so that each of them becomes a full owner of a building. Since both properties have unrealized capital gains and unrealized recapture of depreciation, both taxpayers wish to avail themselves of subsections 44(1) and 13(4).
In this case, you wish to know whether Mr. A and Mr. B can avail themselves of the replacement property rules that apply to an involuntary disposition of property that is not former business property. In this context, you wish to know whether one of the conditions for the application of those rules in the case of an involuntary disposition is satisfied, namely, that the proceeds of disposition received in the context of an application for partition under the Civil Code of Québec ("CCQ") concerning the two rental properties is proceeds of disposition described in paragraph (d) of the definition of "proceeds of disposition" in section 54 and in subsection 13(21).
Our Opinion
In order for a taxpayer to benefit from the replacement property rules on an involuntary disposition, the proceeds of disposition received by the taxpayer must fall within one of paragraphs (b), (c) or (d) of the definition of "proceeds of disposition" in section 54 and/or subsection 13(21). If the replacement property rules apply, a taxpayer may elect to defer recognition of a capital gain and may, in the case of depreciable property, benefit from a rollover of the recapture of depreciation.
Where an application for partition of undivided property is brought before a court, the court may either order partition in kind if the property can be conveniently partitioned or allocated, or sale under the provisions of Chapter X of the Code of Civil Procedure of Quebec relating to the sale of the property of others. You argue that such a procedure may give rise to proceeds of disposition described in paragraph (d) of the definition of "proceeds of disposition".
In this case, we are of the view that Mr. A and Mr. B cannot rely on the rules on the acquisition of replacement property set out in subsections 13(4) or 44(1). In particular, since neither Mr. A nor Mr. B can claim in this case to be able to "take" the other's property pursuant to the C.C.Q. - the court only being able to order the partition of the property or its sale - we believe that the proceeds of disposition resulting from an application for partition are neither compensation for property taken under statutory authority nor the amount of the sale price of the property sold to a person who has given notice of an intention to take it under statutory authority.
Best regards,
Randy Hewlett
Manager
Business and Partnerships Section
Business and Partnerships Division
Income Tax Rulings Directorate.