M.D. Fraulins (613) 957-2123
March 10, 1987
Dear Mrs. Kraayeveld:
Re: Replacement Property
This is in reply to your letter of February 4, 1987, directed to Mr. G. Thornley, concerning the application of the replacement property provisions of subsections 13(4) and 44(5) of the Income Tax act (the "Act").
You were inquiring whether the insurance proceeds from a rental property destroyed by fire could be utilized to acquire a rental property in another province, pursuant to the provisions in subsections 13(4) and 44(5) of the Act. While both the "former" and the "replacement" properties were used for the purpose of earning rental income, you explained that both the type of rental property (principal tenant retail business vs. commercial strip development) and the landlord/tenant relationship (related corporation vs. arm's length tenants) were to be necessarily altered as a result of the exchange.
It appears to us that the situation you summarized in your letter involves a series of proposed actual transactions, the tax implications of which are dependent upon all of the facts in the circumstances. Additionally, as proposed transactions are more properly the subject of an advance ruling it is not the Department's practice, as indicated in Information Circular 70- 6R, to give written opinions concerning proposed transactions. Should you wish to obtain an advance ruling on transactions proposed by your client, please refer to IC 70-6R for the procedure to be undertaken.
We are, however, prepared to offer the following general comments, based on the information provided in your letter.
Our Comments
As indicated in paragraph 14 of interpretation bulletin IT-259R2
Exchanges of Property, subsections 13(4.1), 14(7) and 44(5) provide that a particular property is replacement property, if it is acquired for the same or similar use as the use to which the taxpayer put the former property. Generally, the Department has adopted a fairly broad interpretation of these terms.
The new building in your situation appears to qualify as replacement property since it is used to earn rental income by the owner, which was the use to which the destroyed property had been put. Further, it is our view that geographical location would not necessarily be a critical factor in establishing the use of an asset which otherwise qualifies as a replacement property.
We trust that the above comments will be of assistance to you. Yours truly.
for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and intergovernmental Affairs branch