K. B. Harding (613) 957-2129
December 16, 1986
Dear Sirs:
This is in reply to your letter of November 19, 1986 concerning the replacement property rules under subsections 44(1) and 13(4) of the Income Tax Act.
Your letter sets out a hypothetical situation where a Canadian investment company currently owns land and building (capital property) located in Canada. It is proposed that the investment company will transfer the land and building under subsection 85(1) of the Income Tax Act (electing at the minimum amounts) to an operating company. The operating company will continue to utilize this land and building carrying on its active business operation for a short period of time. The operating company will then dispose of the land and building for an amount in excess of the elected amounts to an arm's length purchaser. Within six months from the disposition of the old building, the operating company will purchase land and building (as replacement property) for an amount in excess of the proceeds of disposition.
As you are aware a 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 our view it is a question of fact whether the operating company acquired and used the property as required. Although we cannot comment definitely on a situation which is a question of fact, it is quite possible that we would consider the property acquired from the investment company to be a former business property if the operating company, with a view to making a profit, used the property in carrying on its active business operation.
We regret we cannot provide you with a definitive response to your question but trust the comments are satisfactory for your purposes.
Yours truly,
for Director
Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch