| 19(1) | File No. 5-9187 |
| G. Thornley | |
| (613) 957-2101 | |
| April 23, 1990 |
Dear Sirs:
Re: Subsection 44(1) of the Income Tax Act (the "Act")
This is in reply to your letter of November 29, 1989 concerning the application of the above noted subsection to a particular fact situation. We apologize for the delay in replying to your letter.
The first part of your enquiry relates to property that has been partly destroyed by fire. It is your view that subsection 44(1) of the Act allows a taxpayer, in the case of destruction by fire, to defer the recognition of a capital gain only when the capital property is destroyed as opposed to only being damaged. With respect to this aspect of your letter we point out that paragraph 12(1)(f) of the Act requires the inclusion in income of insurance proceeds received under a policy of insurance that are expended on repairing the depreciable property that has been damaged. This suggests that where the damaged property is repairable the replacement property rules are not to be applied.
You then provide the following set of facts:
24(1)
You ask if the taxpayer can defer the gain on the disposition of the original property.
In accordance with paragraph 23 of Information Circular 70-6R we are unable to provide written opinions concerning proposed transactions as these are more appropriately the subject of an advance income tax ruling.
We do however provide the following comments with respect to the application of subsection 44(1) of the Act.
Our Comments
1. Property described in paragraph 44(1)(a) for which an amount has become receivable as proceeds of disposition under subparagraphs 54(h)(ii), (iii) and (iv) of the Act is not subject to the "former business property" rules in section 248 of the Act. Thus to the extent that a property has been destroyed (rendered useless or uninhabitable) and proceeds received relative to that destruction, such proceeds may be used to acquire a replacement property as that term is defined in subsection 44(5) of the Act. This, in the appropriate circumstances, could involve the replacement of a rental property by another rental property.
2. As indicated in paragraph 4 of Interpretation Bulletin 259R2 the provisions of subsection 44(1) of the Act apply to each such property and its replacement property individually. In the case of land with a building thereon this term may be considered to refer to each of the land and the building thereon separately and, for purposes of this subsection the capital gain on each of these properties should be calculated separately.
3. As indicated in 1 above the proceeds from an involuntary disposition can be used to acquire a replacement property within the appropriate time frames, without having to conform to the "former business property" description in section 248. However, where the underlying land has not been destroyed or rendered useless, a subsequent disposition of that land would have to conform to the rules in paragraph 44(b) of the Act. We point out, however, that it is a question of fact whether insurance proceeds are for loss or destruction of property pursuant to subparagraph 54(h)(iii) of the Act or damage to property as referred to in 12(1)(f) of the Act.
4. As you are aware, the definition of "former business property" does not include a rental property. Thus where a former rental property that is land is sold, in the circumstances of your example, the gain from such a sale cannot be deferred by the application of subsection 44(1) of the Act.
We trust this is the information you require.
Yours truly,
for DirectorBusiness and General DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch