Dear Sirs:
Re: Similar Business Properties
This is in reply to your letter of July 25, 1991 addressed to the District Taxation Office which was forwarded to us for reply.
You indicate that you have recently realized a capital gain on the disposition of a night club that provided services of entertainment, liquor and food. You are now looking for a replacement property within the service sector such as a hotel with a pub and restaurant that will also provide services of entertainment, liquor and food. You ask if such a property would qualify as a replacement property for purposes of section 44 of the Income Tax Act (the "Act") in order that you may defer the capital gain realized on the sale of the former property.
Our Comments
It is the Department's view that the operation of hotel, restaurant, pub or lounge facilities is a business that provides services and as such would normally qualify as former business properties for purposes of section 44 of the Act in the appropriate circumstances.
With regard to service industries, the Department's position as stated in paragraph 20 of Interpretation Bulletin IT259R2 (a copy of which is attached) is that the determination of whether two businesses are "similar businesses" will have to be made on the facts of each case. In such cases, the Department will interpret "similar business" in a reasonably broad manner. This in our view, has the effect of broadening the meaning of "similar business" in its application to properties used for the purpose of gaining or producing income from a business. The Department's position that it will interpret the phrase "similar business" in a reasonably broad manner only applies, however, where two businesses belong to the same service industry. In this respect a small hotel with a pub and restaurant that provides entertainment, liquor and food services would likely qualify as a similar business when acquired as a replacement for a night club that provided entertainment, liquor and food services.
This opinion is an interpretation of the law as it applies generally. It may not, however, always be appropriate in the circumstances of a particular case, and as stated in paragraph 21 of Information Circular 70-6R2, it is not binding on the Department.
We trust our comments will be of assistance to you.
Yours truly,
for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch