Principal Issues: Can property that is acquired in advance of the disposition of the former property qualify as a replacement property?
Position: Provided the other requirements are met, yes.
Reasons: See below.
2019 CTF Annual Conference
CRA Roundtable
Question 14: Replacement Property Rules - property acquired in advance
The replacement property rules in section 44 permit a taxpayer to defer taxation on any capital gain realized on the disposition of a former property where it is replaced by a replacement property in accordance with the rules in section 44.
Consider this example: A manufacturer owns a plant. It needs to expand its operations and cannot do so on its current property. It acquires a piece of vacant land and proceeds to obtain approvals and to build a new plant. This process can take time, say three years from the date on which the vacant land is purchased to the date on which the property is available for use. The manufacturer moves its operations from the former property to the new property, and eight months after the move to the new property, sells the former property.
Can the CRA confirm that a property that is acquired in advance of the disposition of the former property can qualify as a replacement property?
CRA Response
Generally speaking, subsections 13(4) and 44(1) of the Act 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 a “former business property” is voluntarily disposed of, and a “replacement property” is acquired.
To be considered a replacement property, a particular property must meet all the conditions outlined in subsections 13(4.1) and 44(5). One of the conditions requires that it be reasonable to conclude that the property was acquired by the taxpayer to replace the former property. To satisfy this requirement, there must be some correlation or direct substitution, that is, a causal relationship between the disposition of a former property and the acquisition of the new property or properties. The fact that a property is purchased under a business expansion would not, in and of itself, mean that the property could not be considered a replacement property.
In the case of voluntary dispositions, clause 13(4)(c)(ii)(B) and paragraph 44(1)(d) require that the taxpayer acquire the replacement property before the later of the end of the first taxation year following the initial year and 12 months after the end of the initial year. For purposes of the replacement property rules, the initial year is the tax year in which an amount has become receivable as proceeds of disposition for the former property. There is no requirement in the Act that the replacement property be acquired after the former property is disposed of, as long as it otherwise meets the conditions for being a replacement property.
Thus, while it remains a question of fact, the acquisition of a new property in advance of the disposition of the former property will not, in and of itself, preclude the new property from being a replacement property of the former property.
Matthew Ross
2019-082448
December 3, 2019