Dear Sirs:
This is in reply to your letter of October 10, 1989 concerning the definition of "former business property" in subsection 248(1) of the Income Tax Act (the "Act") and the description of "replacement property" in subsection 44(5) of the Act.
In the first situation, a corporation (Holdco) owns two parcels of land with a building on each parcel. Holdco leases one of these properties to a wholly-owned subsidiary and the other to a related corporation. In each case, the land and building is used by the lessee to carry on manufacturing activities.
If Holdco were to sell the two properties, it is our view that neither of them would be a "former business property" because they are "rental properties" pursuant to the definition of this term within the definition of "former business property" in subsection 248(1) of the Act.
In your second situation, the three corporations described above would amalgamate. Subsequent to the amalgamation, it is our understanding that the two properties would be sold and two other properties (land and buildings) acquired. The manufacturing operations would then be transferred to two new corporations so that the risks of carrying on these operations would be separated.
With respect to the above situation, paragraph 10 of Interpretation Bulletin IT-491 indicates that each of the two properties will be a "former business property" of the amalgamated corporation if it is used, after the amalgamation, by the amalgamated corporation primarily for the purpose of gaining or producing income from a business, and provided it otherwise satisfies the requirements of the definition of "former business property".
With respect to the replacement property rules, paragraph 44(5)(a) refers to property acquired "for the same or a similar use as the use to which he put the former property" and paragraph 44(5)(b) refers to property acquired "for the purpose of gaining or producing income from that or a similar business". In our view, both the underscored parts of the two paragraphs refer to a purpose test. Based on the information provided to us, it is our opinion that neither of the two purpose tests would be satisfied as the two new properties will be acquired for the purpose of being leased to the two new corporations.
We trust that the foregoing comments will be of assistance to you.
Yours truly,
for Director Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch