C. Tremblay (613) 957-2139
July 31, 1987
Dear Sirs:
Re: Similar Business Properties
This is in reply to your letter of June 3, 1987, wherein you requested our interpretation and administrative position as it applies to the definition of former business property, similar business and replacement properties with regards to subsections 13(4), 13(4.1), 44(1), 44(5) and 248(1) of the Income Tax Act (the "Act") in the following hypothetical situation:
1. Corporation X disposed of real property that consisted of approximately 50 hotel rooms, a restaurant, and pub and lounge facilities. This disposition resulted in capital gains and recaptured capital cost allowance.
2. Corporation X is a resident of Canada and presently has no other assets.
3. Until the disposition of this property, more than 50% of Corporation X's net operating revenue was derived from the operation of the restaurant, pub and lounge.
4. Corporation X is considering the acquisition of another property that would qualify for the "replacement property" rules of the Income Tax Act. Corporation X wishes for this new property to primarily consist of a restaurant and pub/lounge facilities. The Corporation is presently looking at acquiring such a property with either no hotel rooms or approximately 10 hotel rooms.
The requirement as to when a replacement property must be purchased is considered to be satisfied for the purposes of this hypothetical situation.
Our Comments
It is the Department's view that the operation of a hotel, restaurant, pub and lounge facilities is a business that provides services and as such will qualify as former business property as referred to in paragraph 44(l)(b) of the Act.
With regard to service industries, the Department's position, as stated in paragraph 20 of IT-259R2 is that the determination of whether two businesses are "similar businesses" will have to be made on the facts of the case. For such cases, the Department will interpret "similar business" in a reasonably broad manner. This, in our view, has the effect of broadening the meaning of "similar business" in its application to properties used for the purpose of gaining or producing income from a business. However, the Department's position that it will interpret the phrase "similar business" in a reasonably broad manner only applies where two businesses belong to the same service industry.
Accordingly, we are inclined to consider that the operation of a hotel which includes a restaurant and lounge, would, for the purposes of paragraph 44(5)(b) of the Act, be a similar business to the operation of a restaurant and lounge.
In our opinion either proposed purchase would thus qualify as a replacement property as defined in paragraph 13(4.1)(b) of the Act for the purposes of deferring recaptured capital cost allowance and in paragraph 44(5)(b) of the Act for the purpose of deferring capital gains.
This opinion is our best interpretation of the law as it applies generally. It may, however, not always be appropriate in the circumstances of a particular case, and as stated in paragraph 24 of Information Circular 70-6R, it is not binding on the Department.
We trust our comments will be of assistance to you.
Yours truly,
for Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch