Principal Issues: 1) Is the condition under paragraph 44(5)b) satisfied if a replacement property is used by a corporation non related to the corporation who owned the former property?
2) Is the condition under paragraph 44(5)b) satisfied if the replacement property is used by a corporation which was related to the corporation who owned (without using it) the former property?
Position: In order to satisfy the condition under paragraph 44(5)b), the person who uses the replacement property must be related to the person who own the property. These two persons must operate a same or similar business and the property must be used for similar purposes.
Reasons: 44(5)b)
APFF Federal Tax Roundtable 11 October 2013
APFF Conference 2013
Question 17
Replacement property in the context of related corporations
ABC Inc. owned Building A, which it leased to its sister corporation Opco Inc. in order to generate rental income. Opco Inc. used Building A in an active business. At the beginning of January 2013, Building A was expropriated.
Opco Inc. moved its business to the premises of an unrelated corporation to continue carrying on its business.
In May 2013, ABC Inc. acquired a new building ("Building B"), replacing Building A, which it leased to an unrelated corporation that uses it in an active business.
ABC Inc. wishes to avail itself of the rollover in section 44. Building A qualifies as a "former business property" within the meaning of section 44.
In order for a capital property of a taxpayer to be a replacement for a "former business property" owned by the taxpayer, the condition set out in paragraph 44(5)(b) must be satisfied, in particular that:
where the former property was used by the taxpayer or a person related to the taxpayer for the purpose of gaining or producing income from a business, the particular capital property was acquired for the purpose of gaining or producing income from that or a similar business or for use by a person related to the taxpayer for such a purpose
In this situation, it appears that ABC Inc. will not be able to benefit from the rollover provided for in section 44 since the new property is not used by Opco Inc. This issue was addressed in question 28 of the APFF Conference in 1990 where it was stated that if this situation were to pose major problems, the Act could possibly be revised.
Questions to the CRA
(a) In light of the presented scenario, does the CRA agree that the condition in paragraph 44(5)(b) is not satisfied?
(b) Would the condition in paragraph 44(5)(b) be met if ABC Inc. had rented Building B to XYZ Inc., another corporation related to ABC Inc., with XYZ Inc. using it in an active business?
CRA response to Question 17(a)
Based on the facts presented, it is our view that Building B is not, to ABC Inc., a replacement property for Building A since the condition set out in paragraph 44(5)(b) is not met. In fact, since Building B was not used by ABC Inc., or a person related to it, to gain or produce income from a business in which Building A was used or a similar business, that building would not qualify as a replacement property.
CRA response to Question 17(b)
The facts as presented do not indicate whether XYZ Inc. uses Building B for the purpose of gaining or producing business income in the same or a similar business as that in which Opco used Building A, which is one of the essential conditions in paragraph 44(5)(b). In the event that this condition is satisfied, we are of the view that the condition in paragraph 44(5 (b) would be satisfied.
In addition, it does not matter if the person who uses Building B is different from the one who used Building A. It is sufficient if the person who uses Building B is related to ABC Inc., being the owner of the building, and that the business in which Building B is being used is the same or similar to that carried on by Opco in using Building A, the former business property.
Sophie Lambert
(613) 957-2121
October 11, 2013
2013-049568