D. Holtz (613) 995-1178
July 3, 1985
Dear Sirs:
Re: Replacement Properties
This is in reply to your letter of April 16, 1985 wherein you requested the Department's views with respect to the application of subsections 44(1) and 13(4) of the Act under various situations.
Your letter describes the following hypothetical situation:
(1) Company A has operated a dealership for several years. It owns the land and buildings utilized in the business.
(2) The sole shareholder of Company A wishes to dispose of the current business and to acquire a similar dealership in a different location.
(3) Company A's supplier will be financing part of the new business venture and a condition of the financing is that the new business be carried on by a "new" corporation.
In order for the taxpayer to achieve its desired objectives and avail itself of the replacement property rules, you presented four possible alternative courses of action. Our comments with respect to each are as follows:
Alternative 1
Company A will dispose of the current operations and land and buildings and will acquire the new land and buildings to be used in the new business. A new corporation, Company B, will acquire the new business operations and will rent the new land and buildings from Company A.
Comment
In our view, the new land and buildings acquired by Company A will not qualify as a replacement property for its former property because it will be held in a rental operation rather than used in the same or similar business. Consequently subsections 44(l) and 13(4) will not apply.
Alternative 2
Prior to the sale of the existing business a new company will be incorporated, Company B, which will acquire the existing business and land and buildings pursuant to Subsection 85(1) from Company A. Company B will then carry on the existing business for a short period of time and then will sell the existing business, land and buildings and will acquire the new business and new land and buildings.
Alternative 3
Prior to the sale of the existing business and land and buildings, Company A will amalgamate with a newly incorporated Company B. Company AB will then continue the business for a short period of time prior to the sale of the existing business, land and buildings following which Company AB will then acquire the new business and land and buildings.
Alternative 4
The individual shareholder of Company A will transfer via Subsection 85(1) his shares of Company A to newly incorporated Company B. Prior to the sale of the existing business and land and buildings Company A will be wound up pursuant to Subsection 88(1) into Company B. Company B will then continue the business for a short period of time and will then sell the existing business, land and buildings and will acquire the new business, land and buildings.
Comment
Former business property of a taxpayer includes real property which is a capital property used by him primarily for the purpose of gaining or producing income from a business. In your last three alternatives, whether or not Company B (or AB) acquired the property primarily for the required use is a question of fact. Although we cannot comment definitively on something which is a question of fact, generally we would consider the property acquired from Company A to be a former business property if Company B (or AB) used the property in the business with a view to making a profit.
Yours truly,
Chief Corporate Reorganizations Section Specialty Corporations Rulings Division Corporate Rulings Directorate Legislation Branch