| 24(1) | 901541 |
| Glen Thornley | |
| (613) 957-2101 |
19(1)
October 1, 1990
Dear Sirs:
Re: Replacement Property Rules
This is in reply to your letter of July 11, 1990 concerning the application of the replacement property rules in sections 44 and 13 of the Income Tax Act (the "Act") in respect of an amalgamation.
Since the situation described in your letter involves a complete transaction which falls within the responsibility of your District Taxation Office, we are unable to comment specifically there on. However, we are prepared to offer the following general comments.
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, inter alia 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 to 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 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).
Thus, where an Amalco disposes of real property acquired in an amalgamation that is not "former business property" of the Amalco, it is precluded from deferring any capital gains and recaptured capital cost allowance that may arise on that disposition.
The Department's administrative position in these matters is set out in the Interpretation Bulletins referred to above. Additionally, where there is no "former business property" involved, subsection 44(6) of the Act has no application.
With respect to representations to the Department of Finance regarding the flow-through of the replacement property rules upon amalgamation, we note that Finance has proposed an amendment to paragraph 44(5)(b) in the current Technical Bill. If enacted in its present form, this amendment would appear to be of assistance to you in this matter.
We trust that our comments will prove helpful.
Yours truly,
for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch