G. Thornley (613) 995-1723
Dear sirs:
Re: Exchange of Property - Section 44 of the Income Tax Act
This is in reply to your letter of March 26, 1982 wherein you requested our comments relative to the application of section 44 of the Income Tax Act (the Act) to the disposition and/or acquisition of certain service station properties.
Your letter was apparently occasioned by a February 10, 1982 telephone conversation with Mr. R. Read, Director, Corporate Rulings Division, concerning the disposition of one service station outlet and the proposed acquisition of 3 similar outlets XXXX. In answer to your question, "Can subsection 44(1) of the Act be applied?" Mr. Read indicated it was possible providing each replacement property of the former single property qualifies under subsection 44(5) of the Act. For subsection 44(1) of the Act to be applicable there must be a direct correlation between the sale of the one outlet and the purchase of the 3 outlets XXXX.
Subsection 44(1) of the Act, as amended, was enacted to permit a business to relocate within a geographical area without adverse income tax consequences. This provision was not intended to encompass business expansions, consolidations, or speculative undertakings which may be the nature of the transactions outlined in your letter as there does not appear to be any correlation between the disposition of a "former business property" and the acquisition of a 'replacement property' or properties.
In our view replacement as used in the phrase "as a replacement for his former property" contemplates a direct substitution, i.e. there should be a causal relationship between the disposition of one property and the acquisition of the replacement property(ies).
Of course the ultimate determination of whether the acquisition of a particular property qualifies as a replacement property depends on the particular facts in each case and a complete review of all relevant documents.
This is also true with respect to:
(1) the determination of 'rental property' as that word is used in the definition of "former business property" in subsection 248(1) of the Act where the principal source of revenue must be determined,
(2) the meaning or timing of "immediately before the disposition" as contained in subsection 44(1) of the Act; and
(3) in the overall determination of "income" versus "capital gains" relative to the frequent turn-over of real estate.
We trust that these general comments will be of some assistant to you. If you have a specific case involving proposed transactions we would be prepared to entertain a request for an advance income tax ruling on the matter.
Yours truly,
Director Corporate Rulings Division Legislation Branch