Dear Sirs:
Re: Replacement Property Rules
This is in response to your letter of October 1, 1991 addressed to Mr. J.C. Fitz-Clarke of the Vancouver District Taxation office that was forwarded to us for reply.
24(1)
It is our understanding that if, as the result of receiving insurance proceeds for property destroyed by fire, a taxpayer acquires a replacement property before the end of the second taxation year following the initial year, the replacement property rules available under subsection 44(1) of the Income Tax Act (the "Act") may be utilized. You ask for a written technical interpretation on whether the proposed replacement property referred to in your fact situation would meet the "the same or similar use" test for "replacement properties" in paragraph 44(5)(a) of the Act.
It appears from your terminology and the facts presented that you are referring to a particular contemplated transaction. Assurance as to the tax consequences of a contemplated transaction can only be given in response to a request for an advance income tax ruling. The procedure for requesting an advance income tax ruling is outlined in Information Circular 70-6R2, published by Revenue Canada, Taxation on September 28, 1990. If you which to obtain any binding commitment with respect to an actual case with facts similar to your example, an advance income tax ruling application should be submitted. Although we are unable to provide any binding assurance here with respect to the queries you have raised, we do provide the following general comments for your information.
Our Comments
As indicated in paragraph 14 of Interpretation Bulletin IT-259R2 Exchanges of Property, subsections 13(4.1), 14(7) and 44(5) provide that a particular property is a replacement property, if it is acquired for the same or similar use as the use to which the taxpayer put the former property. Generally, the Department has adopted a fairly broad interpretation of these terms.
The term "same or similar use" would normally include a situation where a former building, used to earn residential rents, is replaced (as the result of a fire using insurance proceeds) by a building that is used to earn income that is a combination of residential and commercial rents. Thus, in our example the "use" to which the former property was put was renting, therefore, as long as the replacement property is also used only to earn rental income, whether residential rent or commercial rent or a combination of both, it would likely qualify as the "same or similar use".
We trust our comments will prove helpful.
Yours truly,
E. Wheeler for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch
c.c. J.C. Fitz-Clarke, Technical Business Enquiries, Vancouver District Office