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:
Replacement Property rules - voluntary disposition of Franchise
Position:
eligible only in the event of an involuntary disposition, which is unlikely as franchises are not normally subject to destruction, theft or expropriation
Reasons:
As franchise is not an interest in real property, it cannot qualify as former business property for purpose of sec 44
MINISTER/DEPUTY MINISTER’S OFFICE 97-05566M ADM’S OFFICE RETURN TO 15TH FLOOR, ALBION TOWER November 25, 1997
XXXXXXXXXX
Dear XXXXXXXXXX:
The Honourable Herb Dhaliwal, Minister of National Revenue, has asked me to respond to your letter of September 9, 1997, XXXXXXXXXX, addressed to the Honourable Paul Martin, Minister of Finance, concerning the replacement property rules in the Income Tax Act.
In your letter, you indicate that these rules which defer the recognition of income and capital gains on the disposition of property used in the course of business do not apply to the XXXXXXXXXX.
Where property is voluntarily disposed of, such as where a business relocates, the replacement property rules will apply only if the property disposed of qualifies as eligible capital property or "former business property", within the meaning of subsection 248(1) of the Act. As you note, in order to qualify as a "former business property", the property must be real property, or an interest in real property, used primarily for the purpose of gaining or producing income from a business and must not be a rental property. Real property includes fixtures attached to land or a building and an interest in real property includes a leasehold interest. Since XXXXXXXXXX licenses are considered to be a depreciable property and do not meet the definition of "former business property", the replacement property rules would not apply in respect thereof, where the licenses are disposed of voluntarily.
The replacement property rules applicable to voluntary dispositions were introduced in 1977 to facilitate the relocation of businesses. The application of the rules was restricted to real property used in the course of business, since capital property other than real property is generally capable of being transferred to a new location of a business.
Any changes in the rules relating to replacement property would require a change in tax policy and amendments to the Act, which fall within the purview of the Department of Finance. I note that you have already sent your letter to that department for consideration.
I thank you for bringing your views to our attention.
Yours sincerely,
Denis Lefebvre Assistant Deputy Minister Policy and Legislation Branch
A. Humenuk
957-2134
October 6, 1997
Finalized by 97-11-20 -LC/pp