D.S. Delorey (613) 957-2116
May 4, 1987
Dear Sirs:
This is in reply to your letter of March 18, 1987 concerning the replacement property rules under subsection 44(1) of the Income Tax Act (the "Act")
Your letter concerns a hypothetical situation where an individual leases real property to a corporation with which the individual does not deal at arm's length. If the property is rolled into the corporation under subsection 85(1) of the Act and subsequently sold, you ask if the corporation may claim the "replacement property" rollover under subsection 44(1) of the Act.
In order to qualify for the subsection 44(1) rollover, one of the requirements is that the real property has been a "former business property" of the corporation, within the meaning of that term as set out in subsection 248(1) of the Act, immediately before its disposition by the corporation. A former business property includes real property which is capital property used by the taxpayer primarily for the purpose of gaining or producing income from a business. It is a question of fact as to whether a taxpayer is carrying on a business and as to whether a taxpayer used a property primarily for the purpose of gaining or producing income from that business. Although we cannot comment definitely on something which is a question of fact, it is quite possible that if the corporation, with a view to making a profit, used the real property in carrying on its business operations, the real property would be considered to be a former business property.
We trust that the above comments will be of assistance.
Yours truly,
for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch