Principal Issues: Can a taxpayer use the replacement property rules on the sale of vacant land to a municipality where the property is held as a capital property and sold by way of exchange or outright purchase?
Position: No.
Reasons: One of the requirements of the definition of replacement property is that the property "was acquired by the taxpayer and used by the taxpayer or a person related to the taxpayer for a use that is the same as or similar to the use to which the taxpayer or a person related to the taxpayer put the former property". Vacant land cannot meet this requirement since it is not "used" by the taxpayer.
Randy Hewlett, B.Comm.
XXXXXXXXXX 613-941-7239
2004-008842
September 30, 2004
Dear XXXXXXXXXX:
Re: Replacement Property Rules
We are writing in response to your letter of July 21, 2004, wherein you asked for our opinion on the above-noted issue.
In our discussions (Hewlett/XXXXXXXXXX, July 30/04), you indicated that the property in question is vacant land that is held by a taxpayer as capital property. Your letter indicated that the City of XXXXXXXXXX (the "City") has "been authorized by the City Council to negotiate the acquisition of the subject property either by way of exchange or outright purchase". You inquired whether the manner of acquisition by the City would allow the taxpayer to use the replacement property rules under the Income Tax Act.
Our Comments
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to offer the following comments.
The replacement property rules permit a taxpayer to elect to defer the recognition of income or capital gains where a "former property" is involuntarily disposed of, or a former property that is also considered a "former business property" is voluntarily disposed of, and a "replacement property" is acquired. To be considered a replacement property, the particular property must meet all the requirements outlined in the definition of replacement property, which is discussed in detail in Interpretation Bulletin IT-259R4, Exchanges of Property.
One of the requirements of the definition of replacement property is that the property "was acquired by the taxpayer and used by the taxpayer or a person related to the taxpayer for a use that is the same as or similar to the use to which the taxpayer or a person related to the taxpayer put the former property". In general terms, we are of the view that vacant land cannot meet this requirement since it is not "used" by the taxpayer. Consequently, regardless of the manner in which the City acquires the property in the situation described above, we are of the view that the replacement property rules cannot apply.
We trust our comments will be of assistance to you.
Yours truly,
John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch