| 24(1) | 5-901613 |
| R.D. Mundell | |
| 19(1) | (613) 957-2139 |
October 30, 1990
Dear Sirs:
Re: Replacement property rules
This is in reply to your letter of June 28, 1990 concerning the application of the replacement property rules in sections 13 and 44 of the Income Tax Act (the "Act") in respect of an amalgamation.
24(1)
Your proposed transactions are as follows:
1)
2) 24(1)
3)
Your concern, assuming the other conditions of subsections 13(4) and 44(1) are met, is whether the deferral privileges of these provisions would be available to Company C and whether section 245 ("GAAR") would apply. A second concern expressed pertained to the possible application of GAAR to a subsequent transfer of the replacement property by Company C.
Our Comments
Since the situation described above appears to involve actual taxpayers and proposed transactions, that would more appropriately be dealt with by way of an advance income tax ruling we are unable to comment specifically on the issues set out in your letter. However we offer the following general comments regarding the replacement property rules and the application of section 245 of the Act.
In order for a property to be a replacement property in accordance with the provisions of subsections 13(4.1) and 44(5) of the Act, the particular property must, among other things, be acquired by "the" taxpayer. Upon the amalgamation (within the meaning of section 87 of the Act) of two corporations to form a new corporation ("Amalco"), Amalco would be considered to have acquired the property of each predecessor (for the purposes of this requirement of subsections 13(4.1) and 44(5) of the Act) at a cost to Amalco determined in accordance with the provisions of section 87 of the Act. Thus, where prior to an amalgamation one of two predecessor corporations acquired a replacement property that was used by Amalco in its business operation following the amalgamation, that property would not be disqualified from being a replacement property solely on the basis that a predecessor corporation acquired it. However, where one corporation owns real property and leases that property to another corporation, the property in question would be considered rental property. As subsection 248(1) provides that "former business property" does not include a rental property, the property would not qualify as "former business property" for purposes of subsection 44(1). If the corporation which leases the property acquires a property to replace the rented property, as it does not own a "former business property", it cannot acquire a replacement property.
Where real property that was owned and used by a predecessor corporation in its business becomes real property of an amalgamated corporation, it will only be "former business property" of the amalgamated corporation if used, after the amalgamation, by the amalgamated corporation primarily for the purpose of gaining or producing income from a business, and provided the property otherwise satisfies the requirements of the definition of "former business property". (See paragraph 10 of Interpretation Bulletin IT-491 and paragraph 21 of IT-259R2). Where, on the other hand, an Amalco disposes of real property acquired in an amalgamation immediately after that amalgamation, it would not be a "former business property" of the Amalco, because it would not be used as indicated above. Thus the Amalco is precluded from deferring any capital gains and recaptured capital cost allowance that may arise on the disposition.
It is our view that a replacement property must be acquired after the acquisition of the former business property. As an amalgamated corporation acquires all of its property by virtue of the amalgamation, it follows that no property acquired upon the amalgamation can be a replacement property for other property acquired at the same time, except in the case of property described in paragraph 87(2)(1.3). That paragraph resolves the timing difficulty by deeming the replacement property to be acquired by the amalgamated corporation "immediately after" the amalgamation.
The above is the position of the Department under the existing legislation. Draft Amendments to the Act were issued by the Minister of Finance in July 1990, which contain an amendment to paragraph 44(5)(b) extending the replacement property rules relating to capital properties to situations where a former business property was owned by one corporation but used in the business of a related corporation rather than in the corporation's own business. This amendment, if enacted, may be of assistance in many amalgamation situations, by reason of subsection 251(3.1).
An amalgamation of predecessor corporations is not normally an abuse of the Act as it is governed by section 87. Accordingly, where former business properties are disposed of after an amalgamation, it would appear that there would not be a misuse of a provision of the act or an abuse of the act as a whole, within the meaning of those terms in subsection 245(4), and it would be reasonable to conclude that, in the absence of other circumstances, GAAR would not apply.
These comments represent our opinion of the law as it applies generally. As indicated in paragraph 24 of Information Circular 70-6R dated December 18, 1978 this opinion is not a rulings and accordingly, is not binding on Revenue Canada, Taxation.
We trust this will be of assistance.
Yours truly,
for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch