Subject: Replacement Property Rules
This is in reply to your memorandum of July 15, 1991 with attached letter from the Department of Finance requesting our views on the application of the proposed replacement property rules in subsection 13(4.1) and 44(5) of the Income Tax Act (the "Act") as contained in Bill C-18.
You ask in particular for our comments on the application of paragraph (a) of subsections 13(4.1) and 44(5) of the Act.
Our Comments
Paragraph (a) requires that a replacement property be acquired for the same or similar use as the use to which the taxpayer or a related person put the former property. Thus a particular property could be a "replacement property" if it is acquired, for example in the case of a motel owner and operator, for use by the owner as a replacement for an expropriated motel and the owner continues to use (operate) the replacement property as a motel. The test is also met where the owner has previously leased the motel to a relative who operated the motel and the replacement motel is also leased to and operated by the relative. It does not appear, though, that paragraph (a) will have been satisfied where the former property (motel) was operated by the owner himself prior to the expropriation but upon replacement the motel is leased to and operated by a relative who never previously operated it. In this instance the property cannot be said to be acquired by the taxpayer (owner) for the same or similar use as the use to which the taxpayer (owner) put the property. Previously he operated the motel. Now he is leasing the motel. Nor was the property acquired by the owner for the same or similar use as the use to which the related person put the former property as the related person never used the former property.
The "and" after paragraph (b) in subsection 44(5) makes it clear that the 3 paragraphs in that subsection are not mutually exclusive. Thus the conditions in all 3 paragraphs, if applicable, must be met. However, if the "use" condition in (a) is not met, the "similar business" condition in (b) does not have to be considered. On the other hand, if the "use" condition in (a) is met, the "similar business" condition in (b) and the residency condition in (c) must still be considered and met if those "where" factors are present.
To paraphrase part of Finance's letter, under paragraph 44(5)(a) it is our view that where the taxpayer both owned and put the former property to a "business" use, such a taxpayer may not access the replacement property rules in circumstance where the new property is leased to a person related to the taxpayer and it is now that related person who puts the property to a "business" use. Although, providing the former property was used in a business by the taxpayer or a person related to the taxpayer, the test under paragraph (b) will have been met, this is of no assistance to the taxpayer if the test under paragraph (a) has not been met.
B.W. DathDirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch