NO: IT-259R4
DATE: September 23, 2003
SUBJECT: INCOME TAX ACT
Exchange of Property
REFERENCE: Section 44 and subsections 13(4), 13(4.1), 14(6) and 14(7) of the Income Tax Act (the Act) (also sections 70 and 128.1, paragraphs 87(2)(l.3), 88(1)(a) and 96(1)(a) and subparagraph 40(1)(a)(iii) and the definition of “proceeds of disposition” in section 54 and subsection 13(21) of the Act)
Application
This bulletin cancels and replaces Interpretation Bulletin IT-259R3, dated August 4, 1998. The effective date of a particular legislative provision discussed in the bulletin may be indicated in the Explanation of Changes section (or, in some cases, in the Discussion and Interpretation section) of the bulletin. However, where the bulletin is silent with respect to the effective date of a particular provision, such date can be obtained from the legislation itself. Unless otherwise stated, all statutory references throughout the bulletin are to the Act.
Please note that this bulletin has not been revised to reflect the legislative proposals announced December 20, 2002.
Summary
Subsections 13(4) and 44(1) permit a taxpayer to elect to defer the recognition of income or capital gains where a “former property” is involuntarily disposed of, or a former property that is a “former business property” is voluntarily disposed of, and a “replacement property” is acquired. Subsection 14(6) provides similar treatment in respect of eligible capital property that is “former property” voluntarily or involuntarily disposed of where “replacement property” is acquired. Where all the applicable conditions are met, these rules allow taxpayers that have disposed of property to defer the resulting tax consequences and relocate businesses without incurring immediate tax consequences. Where the former property (other than eligible capital property) has been involuntarily disposed of, for example, stolen, destroyed or taken under statutory authority, the replacement property must be acquired within two years of the end of the taxation year in which the disposition of the property is deemed to have occurred and proceeds to have become receivable. Where the property is former business property and the disposition is voluntary, or eligible capital property, the replacement property must be acquired within one year of the end of the taxation year in which the disposition occurred (for depreciable property of a prescribed class or eligible capital property) or when an amount becomes receivable as proceeds of disposition (for capital property). The replacement property must be acquired to replace the former property, have the same or similar use as the former property and, if the former property was used for the purpose of gaining or producing income from a business, the replacement property must be acquired for the purpose of gaining or producing income from the same or a similar business.
Discussion and Interpretation
¶ 1. Subsection 44(1) provides for the deferral of all or part of a capital gain on the disposition of a capital property, other than a share of the capital stock of a corporation, where the property is either:
(a) a property the “proceeds of disposition” of which include compensation for property unlawfully taken (for example, stolen), destroyed or taken under statutory authority (for example, expropriated), insurance proceeds payable for property lost or destroyed, or the sale price of property sold to a person who gave notice of an intention to take it under statutory authority, as described in paragraph (b), (c) or (d) of the definition of “proceeds of disposition” in section 54 or paragraph (b), (c) or (d) of the definition of “proceeds of disposition” in subsection 13(21); or
(b) a property that was immediately before the disposition a former business property of the taxpayer (see below).
Unless otherwise specified, a reference in this bulletin to a former property includes either of the situations described in (a) and (b).
(Dispositions described in (a) above are commonly referred to as “involuntary dispositions” while those in (b) above are commonly referred to as “voluntary dispositions.”)
In addition, all or part of the recapture of capital cost allowance on the disposition of a property described above that is depreciable property of a prescribed class may be deferred by virtue of subsection 13(4), and inclusion of all or part of the proceeds of disposition of an eligible capital property in the computation of cumulative eligible capital may be deferred under subsection 14(6), where a replacement property is acquired (see the current version of IT-123, Transactions Involving Eligible Capital Property).
A “former business property” as defined in subsection 248(1) is capital property that is real property or an interest therein that is used by the taxpayer or a person related to the taxpayer primarily for the purpose of gaining or producing income from a business but generally does not include rental property. (For additional information, see the current version of IT-491, Former Business Property).
¶ 2. In order for the provisions of subsection 44(1), 13(4) or 14(6) to apply, the following requirements must be met:
(a) The taxpayer must dispose of, and acquire, a replacement property, which is, in the case of
(i) subsection 44(1), a capital property,
(ii) subsection 13(4), a depreciable property of a prescribed class, and
(iii) subsection 14(6), an eligible capital property.
Refer to the comments in ¶s 9 to 21 as to what constitutes a replacement property.
(b) For involuntary dispositions of former property (depreciable property of a prescribed class or any other capital property but excluding eligible capital property), the replacement property must be acquired before the end of the second taxation year following the year in which subsection 44(2) deems the disposition of the former property to occur and the proceeds of that disposition to be receivable. The subsection deems the disposition to occur and the proceeds to be receivable in the year in which the earliest of the following events occurs:
(i) the taxpayer agrees on the full amount of compensation for the property;
(ii) the tribunals or courts make the final determination of compensation for the property;
(iii) two years elapse after the loss, destruction or taking of the property if no proceeding before a tribunal or court has been taken before that time;
(iv) the taxpayer dies or ceases to be a resident in Canada which results in the deemed disposition of the property; and
(v) a corporate taxpayer that is not a subsidiary corporation, referred to in subsection 88(1), is wound up.
Where such a former property was taken under statutory authority, the replacement property can be acquired at any time after a taxpayer receives notice of an intention to take the property under statutory authority and before the end of the time period noted above. For example, where a taxpayer received notice of an intention to expropriate in 1997 and the property was expropriated in that year, but pursuant to subsection 44(2) the disposition of that property does not occur until the 1999 taxation year, the taxpayer can acquire the replacement property at any time after the time of notice of an intention to expropriate in 1997 and before the end of the 2001 taxation year.
(c) If the property is described in ¶ 1(b), the replacement property must be acquired before the end of the first taxation year following the taxation year in which
(i) an amount becomes receivable as proceeds of disposition of the former property, in the case of subsection 44(1), or
(ii) the disposition occurred, in the case of subsection 13(4).
For the disposition of an eligible capital property, the replacement property must be acquired within one year after the end of the taxation year in which the former property is disposed.
(d) The replacement property cannot be disposed of prior to the date of disposition of the former property. In the example in (b) above, a property acquired in 1997 and disposed of in 1998 could not be a replacement property.
(e) Except where the property is described in ¶ 1(a), the property disposed of must be a former business property or an eligible capital property.
(f) A valid election must be made (see ¶ 7).
There is no requirement in the Act that the replacement property be acquired after the former property is disposed of, but the property must nevertheless qualify as a replacement property. For further comments where there is an amalgamation or a winding-up, see ¶ 22.
¶ 3. A taxpayer is required to report any recaptured capital cost allowance, taxable capital gain or amount determined under subsection 14(1) arising from the disposition of a former property in the year of disposition where the replacement property is acquired in a subsequent taxation year. However, provided a replacement property is acquired within the specified time limits, the taxpayer may request that the income tax return for the year of disposition of the former property be reassessed to generate a refund in respect of the income taxes paid on income arising on that disposition. In order to alleviate the financial burden that might ensue from this situation, acceptable security may be provided in lieu of payment of taxes owing until the time for the final determination of taxes is made or the time period for acquiring the replacement property has expired. Where this practice is followed, the full cost of providing such security is borne by the taxpayer and the interest on the unpaid taxes will continue to accrue at the appropriate prescribed rates subject to being reduced by interest credited on any subsequent reassessment giving effect to the deferral.
¶ 4. Where more than one capital property has been disposed of in circumstances where subsection 44(1) is applicable, the provisions of that subsection apply to each such property and its replacement property individually. In the case of land and buildings thereon, this term is considered to refer to land and each individual building thereon separately and, for purposes of this subsection, the capital gain on each of these properties should be calculated separately. However, under subsection 44(6) a taxpayer may be permitted to reallocate the proceeds of disposition of a former business property composed of land and one or more buildings between the land component and the building component. The amount eligible for reallocation is limited to the excess of proceeds of disposition otherwise determined of one or the other of the components over its adjusted cost base. If, for instance, the proceeds of disposition of land determined without reference to subsection 44(6) exceed its adjusted cost base, a taxpayer can elect to treat all or a portion of the excess as being proceeds of disposition of the building component of the former business property and thereby defer recognition of all or a portion of the accrued capital gain with respect to the land. See ¶ 29 for an example of the operation of subsection 44(6). The election to change the allocation between land and building must be filed in an income tax return of the taxpayer for the year in which the replacement property is acquired. “Land,” for the purposes of subsection 44(6), is “the land (or an interest therein) subjacent to, or immediately contiguous to and necessary for the use of, the building.”
¶ 5. When a taxpayer calculates a capital gain under subsection 44(1) for a particular taxation year, a reserve provided by subparagraph 40(1)(a)(iii) may not be claimed. However, subparagraph 44(1)(e)(iii) provides that a reasonable reserve in respect of proceeds of disposition that are payable after the end of the year is available in most instances, based on the capital gain as reduced under subsection 44(1). Where promissory notes are included as proceeds, see the current version of IT-436, Reserves – Where Promissory Notes Are Included in Disposal Proceeds. Pursuant to subsection 44(7), no such reserve is allowed where the taxpayer, at the end of the year or at any time in the immediately following year, is not resident in Canada or is exempt from tax under Part I of the Act, or where the person that acquires the former property of the taxpayer is a controlled or controlling corporation as described in paragraph 44(7)(b).
¶ 6. Other restrictions on allowable reserves are provided by subparagraph 44(1)(e)(iii) which limit reserves in order that at least one fifth of a gain is recognized in the year of disposition of the property and in each of the four following years. Gains in respect of certain transfers to children are eligible for a deferral extending over a ten-year period rather than the five-year period referred to above. This exception is provided in subsection 44(1.1) and applies only to dispositions from a parent to a child of family farm land and buildings where the rules in subsection 73(3) also apply. An individual (other than a trust) who is claiming a reserve under subparagraph 44(1)(e)(iii) should use the prescribed form, T1030, Election to Claim a Capital Gains Reserve for Individuals (other than trusts) When Calculating the Amount of a Capital Gain Using the Replacement Property Rules, while other taxpayers may claim the reserve in their income tax returns.
Election to Use Subsections 44(1), 13(4) and 14(6)
¶ 7. A taxpayer must elect to have the provisions of subsections 44(1), 13(4) and 14(6) apply. The election should be made as follows:
(a) If the disposition and replacement take place in the same year, the taxpayer’s calculation (in the income tax return for that year) of the recaptured capital cost allowance, the amount under subsection 14(5) by reason of subsection 14(6) (that is, for purposes of determining the balance in the pool of eligible capital property – see the current version of IT-123), or the capital gain by virtue of subsection 44(1) will be considered to constitute an election.
(b) If the property is not replaced until a subsequent year, the election should take the form of a letter attached to the income tax return for the year the replacement property is acquired. The letter should include a description of the replacement property and the former property, a request for an adjustment to the recapture of capital cost allowance, the taxable capital gain reported, or the amount included in income by virtue of subsection 14(1) in a prior year, and a calculation of the revised recapture, taxable capital gain or cumulative eligible capital.
(c) If the replacement property is acquired prior to the year of disposition of the property, the election to apply subsections 13(4), 44(1) and 14(6) should take the form of a letter attached to the income tax return for the year in which the replacement property is acquired and the letter should include descriptions of the replacement property and the property that is to be replaced. If the taxpayer late-files such an election, it will be accepted if it is filed in the income tax return for the year in which the former property is disposed of, provided it is evident that the new property qualifies as a replacement property.
If a former property is depreciable property, subsection 44(4) provides that if a taxpayer elects on that property under subsection 44(1), the taxpayer is deemed to have elected also under subsection 13(4), and if the taxpayer elects under subsection 13(4), the taxpayer is deemed to have elected under subsection 44(1) as well.
¶ 8. Under the combined provisions of subsection 220(3.2) of the Act and Part VI of the Regulations, depending on the circumstances,
(a) a late or amended election under subsection 13(4), 14(6), 44(1) or 44(6); or
(b) a request to revoke such an election;
may be accepted.
For further particulars, see the current version of Information Circular 92-1, Guidelines for Accepting Late, Amended or Revoked Elections.
Replacement Property – General
¶ 9. A taxpayer is considered to have acquired replacement property at the time the acquisition would ordinarily be considered to have been made under the provisions of the Act and the general principles of law. See the current version of IT-285, Capital Cost Allowance – General Comments, for a discussion of the time of acquisition of depreciable property. Where a replacement property can be considered to have been acquired, it is not necessary that the total acquisition cost be paid in cash. For example, where a qualifying replacement property has been acquired at a cost of $100,000 with $20,000 paid in cash, and the balance covered by a mortgage, the total cost of $100,000 qualifies for purposes of the subsection 44(1), 13(4) or 14(6) election. On the other hand, where, at a given time, an amount has been paid, for example in the form of the deposit on a replacement property, and that property has not been acquired, the amount expended does not so qualify.
¶ 10. In some situations, it may be necessary to purchase more than one property to replace another. In such situations, each of the properties purchased will be considered a replacement property provided each qualifies as a replacement of the original property. Conversely, the replacement of two or more capital properties with one property may also be accepted. See illustrations in ¶s 27 and 28.
¶ 11. The fact that the specific funds received for the former property are used to acquire another property in no way bears on the determination of whether or not the acquired property constitutes a replacement. It also follows that where a taxpayer temporarily invests such funds pending a decision on the acquisition of a replacement property, the temporary investment would normally not itself constitute the replacement.
¶ 12. Where a taxpayer reacquires a former property within the time period described in ¶ 2(b) as a result of, for example, the abandonment of the property by the expropriating authority, the taxpayer is considered to have acquired the property as a replacement.
¶ 13. If a taxpayer exchanges one property for another, the new property will qualify as a replacement property provided it is in fact a replacement property and the other requirements of subsection 44(1) are met. Examples of such exchanges are as follows:
(a) An expropriating authority exchanges properties with a taxpayer.
(b) Taxpayer A exchanges farm lands with taxpayer B.
¶ 14. By virtue of subsections 13(4.1), 14(7) and 44(5), a particular property acquired by the taxpayer will qualify as a replacement property for the former property owned by the taxpayer (for purposes of the rules in subsection 13(4) for depreciable property, subsection 14(6) for eligible capital property and section 44 for capital property, respectively) if it meets each one of the following conditions that is applicable:
(a) for eligible capital property
(i) it must be reasonable to conclude that the property was acquired by the taxpayer to replace the former property;
(ii) it must be acquired by the taxpayer for a use that is the same as or similar to the use to which the taxpayer put the former property;
(iii) it must be acquired for the purpose of gaining or producing income from the same or a similar business as that in which the former property was used; and
(iv) where the former property was used by the taxpayer in a business carried on in Canada, it must be acquired for use by the taxpayer in a business carried on by the taxpayer in Canada.
(b) for depreciable property of a prescribed class and other capital property
(i) it must be reasonable to conclude that the property was acquired by the taxpayer to replace the former property;
(ii) it must be acquired by the taxpayer and used by the taxpayer or a person related to the taxpayer for a use that is the same as or similar to the use to which the taxpayer or a person related to the taxpayer put the former property;
(iii) where the former property was used by the taxpayer or a person related to the taxpayer for the purpose of gaining or producing income from a business, it must be acquired for the purpose of gaining or producing income from that or a similar business or for the use by a person related to the taxpayer for such a purpose;
(iv) where the former property was taxable Canadian property, the particular depreciable or capital property is also a taxable Canadian property of the taxpayer; and
(v) where the former property was a taxable Canadian property of the taxpayer that is not a treaty-protected property, the particular depreciable or capital property is also a taxable Canadian property of the taxpayer that is not a treaty-protected property.
Replace the Former Property
¶ 15. To satisfy the requirement in paragraph 14(7)(a) and in paragraphs 13(4.1)(a) and 44(5)(a) (as described in ¶s 14(a)(i) and 14(b)(i)), it must be reasonable to conclude that the property was acquired to replace the former property. In this regard, there must be some correlation or direct substitution, that is, a causal relationship between the disposition of a former property and the acquisition of the new property or properties. Where it cannot readily be determined whether one property is actually being replaced by another, the newly acquired property will not be considered a replacement property for the former property. For example, consider the situation where a taxpayer has a number of retail locations some of which are in the process of commencing operations while others are scheduled for closing. A new location probably would not be considered a replacement property for an old location if the business operations at the two locations are carried on simultaneously (other than for a brief transitional period, for example, while the inventory at the old location is liquidated). Generally, the geographical location of the “replacement property” is not determinative when considering whether one property is a replacement for another.
Same or a Similar Use
¶ 16. Where a former property described in ¶ 1(a) was not used for the purpose of gaining or producing income from a business, the following comments apply in determining whether a replacement property is acquired for “the same or a similar use” as required by paragraphs 13(4.1)(a.1) and 44(5)(a.1) (as described in ¶ 14(b)(ii)).
(a) This requirement is met where the use of the property is the same or similar to the use to which the taxpayer or a person related to the taxpayer put the former property. Since the former property must have been used, land that has never been used by the taxpayer or a related person cannot qualify as a former property. Land (or any other capital property) that has been used for non-income earning purposes can qualify as a former property (for example, a personal-use cottage that is expropriated). Land that is acquired for resale cannot qualify because it is not a capital property.
(b) Although the property generally will bear the same physical description as the former property, for example, land replaced by land or a building by a building (but see ¶ 4), there may be cases where a different type of property provides the same use or function as the former property. For example, where shares of a cooperative corporation which carry rights to accommodation in an office building are acquired to replace an expropriated office building of the taxpayer, the shares could constitute a replacement property.
¶ 17. Where the former property was used for the purpose of gaining or producing income from a business, another property will usually be considered to be a property acquired for the “same or a similar use” if it is acquired to gain or produce income from the same or a similar business and if it generally bears the same physical description as the former property. For example, a taxpayer may replace a warehouse with a manufacturing building used in the same or a similar business because both properties are buildings and the two uses are “similar” in that they are both part of the overall process of providing products from the same or a similar business to the consumer. It must be kept in mind, however, that the “same or a similar use” test referred to in ¶ 14(a)(ii) and (b)(ii) is still a separate test from, and is not overridden by, the “same or a similar business” test referred to in ¶ 14(a)(iii) and (b)(iii) and discussed in ¶s 18 to 21. Thus, for example, if a company owned a residential property used to house its employees, a building used to carry on the company’s day-to-day operations would generally not be considered as having the “same or a similar use” even though both properties are real property and are used in the same business. Also, a property normally will not be a replacement property acquired for the same or a similar use when it is acquired to replace a former property and at the same time provide substantial other uses. An insignificant secondary use of a new replacement property is not a concern. A former business property cannot be replaced with a rental property.
Same or a Similar Business
¶ 18. The term “similar business” as used in the phrase “the same or a similar business” or “from that or a similar business” in paragraphs 13(4.1)(b), 14(7)(b) and 44(5)(b) (see ¶ 14(a)(iii) and (b)(iii)) are interpreted in a reasonably broad manner. In this respect, two businesses will be considered to be “similar” if they both fall within the same one of the following categories:
(a) merchandising – retailing and wholesaling;
(b) farming;
(c) fishing;
(d) forestry and forest products;
(e) extractive industries, including refining;
(f) financial services;
(g) communications;
(h) transportation;
(i) construction, including subcontracting; and
(j) manufacturing and processing.
¶ 19. With regard to the categories referred to in ¶ 18, where a business falls into more than one, a similar business will be one that falls into any one of these categories for which the business qualifies; for example, a plywood plant qualifies under category (d) – forestry and forest products, and under category (j) – manufacturing and processing. As a result, if the plywood plant is sold, any business that falls in category (d) or category (j) will be considered a “similar business.”
¶ 20. A taxpayer who changes from one business category to another but continues to deal in the same product will normally be considered to be in a “similar business.” For example, a taxpayer involved in the merchandising of a product may change to the manufacture and production of the same product and still be considered to be in a “similar” business. On the other hand, where a taxpayer carries on a number of separate businesses (see the current version of IT-206, Separate Businesses) and the same products are not involved, these businesses will not be considered to be similar businesses. For example, a taxpayer who operates a hotel business and a manufacturing business as separate businesses cannot be considered to have similar businesses.
¶ 21. Service industries, such as hotels, restaurants, repairs, professional services, barbershops, funeral parlours, laundries, real estate agencies, tourism, and entertainment, are not included in the categories referred to in ¶ 18, because most of these industries are too varied and different to permit categorization. Where there is a question of whether two businesses in a service industry or in any other industry not included in the categories in ¶ 18 are “similar businesses,” the determination will have to be made on the facts of the case. For such cases, “similar business” will be interpreted in a reasonably broad manner.
Amalgamations and Wind-Ups
¶ 22. In a situation where, before a section 87 amalgamation occurs, property of a predecessor corporation
(a) has been lost, stolen, destroyed or expropriated, or
(b) was a “former business property” of the predecessor corporation,
paragraph 87(2)(l.3) prevents the deferral rules in sections 13 and 44 from being lost. Paragraph 87(2)(l.3) does this by deeming, for purposes of applying those sections and the definition of “former business property” in subsection 248(1) to the new corporation with respect to the former property and any replacement property acquired for the former property, that the new corporation is the same corporation as, and is a continuation of, the predecessor corporation. Paragraph 88(1)(e.2) similarly prevents the loss of such a deferral in a winding-up to which subsection 88(1) applies. Also, since properties distributed to a parent by a subsidiary in a winding-up are deemed by paragraph 88(1)(a) to have been disposed of by the subsidiary and are thus considered to have been acquired by the parent, a property acquired upon winding up may serve as a replacement property for purposes of subsections 13(4.1), 14(7) and 44(5) in respect of the disposition of a “former property” by the parent corporation if all of the other requirements of the relevant subsection are satisfied. While paragraphs 87(2)(l.3) and 88(1)(e.2) prevent the deferral rules from being lost, it may not be reasonable to conclude that property acquired by a corporation prior to an amalgamation or acquired by the parent corporation as a consequence of the winding-up of a subsidiary corporation is a replacement property for property disposed of by the amalgamated corporation, by a predecessor corporation that is included in the amalgamation, or by the parent corporation where a subsidiary has been wound up. Each situation must be considered on its facts to determine whether it is reasonable to conclude that the acquired property is a replacement property for the former property or former business property.
Partnerships
¶ 23. Subsections 44(1), 14(6) and 13(4) apply to a partnership if the requirements outlined in ¶ 2 are met. Section 44 and subsection 13(4) would also apply to a member of a partnership who acquires a replacement property for a personally owned former business property which is or was being used in the partnership business. These provisions would not apply however to a situation where the partnership disposes of a former business property and a partner (or partners) acquires the replacement property because, pursuant to paragraph 96(1)(a), the partnership is considered to be a person separate from its partners for purposes of income and loss computations under subdivision j.
Non-Residents and Deceased Taxpayers
¶ 24. The provisions of subsections 44(1) and 13(4) can apply to a non-resident who has disposed of taxable Canadian property and who acquires a qualifying replacement property that is also taxable Canadian property. See also ¶ 14(a)(iv) and 14(b)(iv).
¶ 25. Where a taxpayer dies or ceases to be resident in Canada and is deemed pursuant to section 70 or paragraph 128.1(4)(b) respectively to have disposed of a capital property, the provisions of subsections 13(4) and 44(1) do not apply. However, where a taxpayer dies, subsection 72(2) will, in certain circumstances, permit an election so that a reserve under subsection 44(1) may be claimed in respect of the deceased person.
Adjustment Resulting from the Replacement of the Former Property – Examples
¶ 26. Where a replacement property has been acquired, and the taxpayer complies with the requirements noted in ¶ 2, subsections 44(1) and 13(4) provide certain rules that affect the gain resulting from the disposition of the former property and also the ultimate disposition of the replacement property. The following examples illustrate the application of these provisions to the expropriation of a property, which constituted depreciable property of a prescribed class to the former owner:
Example
Assume:
| (1) Original capital cost of the former property (acquired in the 1980 taxation year) | $100,000 |
| (2) Date of expropriation | June 30, 1997 |
| (3) Year-end of the taxpayer | December 31 |
| (4) Date replacement property acquired | June 30, 1999 |
| (5) Original capital cost of the replacement property | $130,000 |
| (6) Day on which the former property is deemed to have been disposed of pursuant to subsection 44(2) | June 30, 2000 |
| (7) Proceeds of disposition determined as of the day in (6) above | $175,000 |
| Replacement Property in a DIFFERENT CCA Class than Former Property | Replacement Property in the SAME CCA Class as Former Property | |||
|---|---|---|---|---|
| Application of Subsection 44(1) | ||||
(1) Gain on Disposition of Former Property determined under paragraph 44(1)(e) (year ending December 31, 2000) | ||||
Lesser of: | ||||
(a) Gain otherwise determined: | $175,000 100,000 | $75,000 | $175,000 100,000 | $75,000 |
(b) Amount by which: | $175,000 130,000 | $45,000 | $175,000 130,000 | $45,000 |
Gain on disposal | $45,000 | $45,000 | ||
| Replacement Property in a DIFFERENT CCA Class than Former Property | Replacement Property in the SAME CCA Class as Former Property | ||||
|---|---|---|---|---|---|
(2) Capital Cost of Replacement Property determined under paragraph 44(1)(f) after June 30, 2000 | |||||
Original cost | $130,000 | $130,000 | |||
Less: Amount by which (1)(a) above | $75,000 | ||||
Exceeds (1)(b) above | 45,000 | 30,000 | $100,000 | 30,000 | $100,000 |
| Replacement Property in a DIFFERENT CCA Class than Former Property | Replacement Property in the SAME CCA Class as Former Property | ||
|---|---|---|---|
| Class A (Former Property) | Class B (Replacement Property) | Class A (Both Properties) | |
| Undepreciated Capital Cost (UCC) at December 31, 2000 | |||
(3) Subsection 13(21) | |||
(A of the definition of UCC in subsection 13(21)) | $100,000 | $100,000 | |
Capital cost of replacement property | |||
(A of the definition of UCC in subsection 13(21)) adjusted by paragraph 44(1)(f)) | N/A | $100,000 | 100,000 |
| 100,000 | 100,000 | 200,000 | |
Less: Capital cost allowance claimed (assumed) (E of the definition of UCC in subsection 13(21)) | 90,000 | 5,000 | 95,000 |
| 10,000 | 95,000 | 105,000 | |
Less: Disposition of former property determined under paragraph 13(4)(c) (Note 1) | 10,000 | N/A | 10,000 |
Less: Disposition of a depreciable property determined under paragraph 13(4)(d) (Note 2) | N/A | 90,000 | 90,000 |
UCC at the end of the year | NIL | $5,000 | $5,000 |
Note 1
| Replacement Property in a DIFFERENT CCA Class than Former Property | Replacement Property in the SAME CCA Class as Former Property | |||
|---|---|---|---|---|
| Disposition of former property determined under paragraph 13(4)(c): | ||||
| Amount otherwise determined under F of the definition of UCC in subsection 13(21) | $100,000 | $100,000 | ||
| Deduct: lesser of: | ||||
(i) amount otherwise determined under F of the definition of UCC in subsection 13(21) | $100,000 | $100,000 | ||
Deduct: UCC immediately before the time the former property was disposed of | 10,000 | 10,000 | ||
| 90,000 | 90,000 | 90,000 | 90,000 | |
(ii) acquisition cost of replacement property | $130,000 | $130,000 | ||
| $10,000 | $10,000 | |||
Note 2
Pursuant to paragraph 13(4)(d), the reduction determined under paragraph 13(4)(c) of $90,000 in both cases is deemed to be proceeds of disposition of a depreciable property that had a capital cost equal to that amount and that was property of the same class as the replacement property.
¶ 27. Where two or more capital properties of the taxpayer are replaced by one replacement property, for example, two expropriated buildings are replaced by one building, for the purpose of subsections 13(4) and 44(1), that portion of the cost of the replacement that can be considered to be a replacement for a particular former property can be allocated by the taxpayer on a reasonable basis to the particular former property. (Normally the allocation should be based on the proportion that the original cost of a former property is to the total cost of all former properties.) To illustrate:
Example
| Former Properties A | Former Properties B | Replacement Property C | |
|---|---|---|---|
| Assume: | |||
1. Cost of former properties and Capital Cost Allowance class | $200,000 | $100,000 | |
2. Proceeds of disposition of former properties | $300,000 | $200,000 | |
3. Original cost of replacement property and Capital Cost Allowance class | $450,000 |
Application of subsection 44(1)
| (1) Gain on Disposition of Former Property under paragraph 44(1)(e) | |||
Lesser of: | |||
(a) Gain otherwise determined | $100,000 | $100,000 | |
(b) Amount by which: | |||
Proceeds of disposition exceed the cost of the replacement property attributable to each former property | $300,000 | $200,000 | |
($200,000 ÷ $300,000) × $450,000 = | 300,000 | ||
($100,000 ÷ $300,000) × $450,000 = | 150,000 | ||
| NIL | $50,000 | ||
Gain on disposal | NIL | $50,000 | |
(2) Cost of Replacement Property under paragraph 44(1)(f) | |||
Original Cost | $450,000 | ||
Less: Amount by which (1)(a) above | $100,000 | $100,000 | |
Exceeds (1)(b) above | NIL | 50,000 | |
$100,000 | $50,000 | 150,000 | |
Cost of replacement property | $300,000 |
Class 3 | Class 6 | |
|---|---|---|
| (3) Undepreciated Capital Cost | ||
Capital Cost of Former Properties | $200,000 | $100,000 |
Less: Capital Cost Allowance claimed (assumed) | 150,000 | 75,000 |
UCC immediately before disposition | $50,000 | $25,000 |
Addition of Replacement property | N/A | 300,000 |
| $50,000 | $325,000 | |
Less: Disposition of former property determined under paragraph 13(4)(c) (Note 1) | 50,000 | 25,000 |
Less: Disposition of a depreciable property determined under paragraph 13(4)(d) (Note 2) | N/A | 225,000 |
UCC after above adjustments | NIL | $75,000 |
Note 1
Disposition of former properties under paragraph 13(4)(c):
Former | Former | Former | Former | |
| Amount otherwise determined under F of the definition of UCC in subsection 13(21) | $200,000 | $100,000 | ||
| Deduct: lesser of: | ||||
(i) amount otherwise determined under F of the definition of UCC in subsection 13(21) | $200,000 | $100,000 | ||
Deduct: UCC immediately before the time the property was disposed of | 50,000 | 25,000 | ||
$150,000 | 150,000 | $ 75,000 | 75,000 | |
(ii) acquisition cost of replacement property attributable to each former property (see (1) above) | $300,000 | $150,000 | ||
| $50,000 | $25,000 |
Note 2
Pursuant to paragraph 13(4)(d), the reductions determined under paragraph 13(4)(c) of $150,000 for former property A and $75,000 for former property B are deemed to be proceeds of disposition of a depreciable property that had a capital cost equal to that amount and that was property of the same class as the replacement property.
¶ 28. Where, in the reverse situation, one property is replaced by two or more replacement properties for the purpose of subsection 44(1), the cost of each replacement property can be aggregated in determining the amount of the gain from the former property. In situations, such as where the replacement properties constitute properties of different prescribed classes or where one such property is acquired prior to the disposition of the former property and the other within the allowable period after the disposition of the former property, it may be necessary to make a reasonable apportionment of the proceeds of disposition determined under paragraph 13(4) and of the cost of replacement properties determined under paragraph 44(1)(f). (Normally the allocation should be based on the proportion that the original cost of a replacement property is to the total costs of all replacement properties.)
Example
| Former Property A | Replacement Properties B | Replacement Properties C | |
|---|---|---|---|
| Assume: | |||
| 1. Cost of former property and Capital Cost Allowance class | $300,000 (class 3) | ||
| 2. Proceeds of disposition of former property | $500,000 | ||
| 3. Original cost of replacement properties and Capital Cost Allowance class | $300,000 (class 3) | $150,000 (class 6) | |
| Application of subsection 44(1) (1) Gain on Disposition of Former Property – paragraph 44(1)(e) | |||
Lesser of: | $200,000 | ||
(b) Amount by which: | |||
Proceeds of disposition | $500,000 | ||
Exceed the cost of the replacement property | 450,000 | ||
| $ 50,000 | |||
Gain on disposal | $50,000 |
| Replacement Properties B | Replacement Properties C | ||
|---|---|---|---|
| (2) Cost of Replacement Properties – paragraph 44(1)(f) | |||
Original Cost | $300,000 | $150,000 | |
Less: Amount by which (1)(a) above | $200,000 | ||
Exceeds (1)(b) above | 50,000 | ||
| $150,000 | |||
Deduct: Amount of $150,000 above to be allocated to property B | |||
($300,000 ÷ $450,000) × $150,000 | 100,000 | ||
Deduct: Amount of $150,000 above to be allocated to property C | |||
($150,000 ÷ $450,000) × $150,000 | 50,000 | ||
Cost of replacement properties | $200,000 | $100,000 |
Class 3 | Class 3 | Class 6 | |
|---|---|---|---|
| (3) Undepreciated Capital Cost | |||
Capital Cost of Former Properties | $300,000 | ||
Less: Capital Cost Allowance claimed (assumed) | 100,000 | ||
UCC immediately before disposition | 200,000 | ||
Plus Addition of Replacement property | |||
– capital cost adjusted by paragraph 44(1)(f) | 200,000 | $100,000 | |
| $400,000 | $100,000 | ||
Less: Disposition of former property determined under paragraph 13(4)(c) (Note 1) | 200,000 | ||
Less: Disposition of a depreciable property determined under paragraph 13(4)(d) (Note 2) | |||
($300,000 ÷ $450,000) × $100,000 = | 66,667 | ||
($150,000 ÷ $450,000) × $100,000 = | 33,333 | ||
UCC after adjustments | $133,333 | $66,667 | |
| Note 1 Disposition of former properties under paragraph 13(4)(c): Amount otherwise determined under F of the definition UCC in subsection 13(21) | $300,000 | ||
| Deduct: lesser of: | |||
(i) amount otherwise determined under F of the definition in subsection 13(21) | $300,000 | ||
Deduct: UCC immediately before the time the property was disposed of | 200,000 | $100,000 | |
| 100,000 | |||
(ii) acquisition cost of replacement properties | |||
($300,000 + $150,000) | $450,000 | ||
| $200,000 |
Note 2
Pursuant to paragraph 13(4)(d), the reductions determined under paragraph 13(4)(c) of $100,000 is deemed to be proceeds of disposition of a depreciable property that had a capital cost equal to that amount and that was property of the same class as the replacement property. Because the replacement property was included in two classes, the amount determined under paragraph 13(4)(d) has been apportioned between the two classes.
¶ 29. Subsection 44(6) provides a mechanism for a taxpayer who disposes of a former business property consisting of, for example, a building of low value and land of high value to permit the allocation of part of the proceeds of disposition of the land to the building. The reallocated proceeds can then be used in the application of subsection 44(1). The applications of subsections 44(6), 44(1) and 13(4) and the computation under subsection 13(21) are illustrated in the following example:
Example
Assume:
| (1) Cost of former land | $10,000 |
| (2) Capital cost of former building | $90,000 |
| (3) UCC of class of former building at March 31, 2000 | $15,000 |
| (4) Date of disposition of former business property and acquisition of replacement property | March 31, 2000 |
| (5) Proceeds from sale of former land | $100,000 |
| (6) Proceeds from sale of former building | $25,000 |
| (7) Cost of replacement land | $40,000 |
| (8) Cost of replacement building of different class from former building | $60,000 |
(1) Reallocation of Proceeds under subsection 44(6)
(a) Land | |||
• Proceeds | $100,000 | ||
• Less: Adjusted cost base (cost) | 10,000 | ||
Amount available | $90,000 | ||
(b) Building | |||
• Proceeds | $25,000 | ||
• Less: Adjusted cost base (capital cost) | 90,000 | ||
Amount available | NIL | ||
For illustration purposes, computations are made reallocating (A) $90,000, (B) $60,000 and (C) $35,000 as elected amounts from the proceeds of disposition of the land to the proceeds of disposition of the building: | |||
(c) Reallocated proceeds are: | |||
(A) | (B) | (C) | |
(i) Land | $ 10,000 | $ 40,000 | $ 65,000 |
(ii) Building | 115,000 | 85,000 | 60,000 |
Combined proceeds | $125,000 | $125,000 | $125,000 |
(2) Application of subsection 44(1)
(a) Gain on disposition of land: | |||
(A) | (B) | (C) | |
(i) Reallocated Proceeds | $10,000 | $40,000 | $65,000 |
Less: Adjusted cost base (cost) | 10,000 | 10,000 | 10,000 |
Gain under clause 44(1)(e)(i)(A) | NIL | $30,000 | $55,000 |
(ii) Reallocated proceeds | $10,000 | $40,000 | $65,000 |
Less: Cost of replacement land | 40,000 | 40,000 | 40,000 |
Gain under clause 44(1)(e)(i)(B) | NIL | NIL | $25,000 |
Gain under subparagraph 44(1)(e)(i) is the lesser of (i) and (ii) | NIL | NIL | $25,000 |
(b) Gain on disposition of building: | |||
(A) | (B) | (C) | |
(i) Reallocated proceeds | $115,000 | $85,000 | $60,000 |
Less: Lesser of | |||
(A) original proceeds ($25,000) and | |||
(B) adjusted cost base ($90,000) | 25,000 | 25,000 | 25,000 |
Gain under clause 44(1)(e)(i)(A) | $ 90,000 | $ 60,000 | $ 35,000 |
(ii) Reallocated proceeds | $115,000 | $85,000 | $60,000 |
Less: Cost of replacement building | 60,000 | 60,000 | 60,000 |
Gain under clause 44(1)(e)(i)(B) | $ 55,000 | $ 25,000 | NIL |
Gain on disposition of building is the lesser of (i) and (ii) | $ 55,000 | $ 25,000 | NIL |
(c) Cost of replacement land: | |||
(A) | (B) | (C) | |
Cost otherwise determined | $40,000 | $40,000 | $40,000 |
Less: the amount by which | |||
(a)(i) above | NIL | $30,000 | $55,000 |
exceeds (a)(ii) above | NIL | NIL | 25,000 |
NIL | $ 30,000 | $ 30,000 | |
Cost of replacement land | $40,000 | $10,000 | $10,000 |
(d) Capital cost of replacement building: | |||
(A) | (B) | (C) | |
Capital cost otherwise determined | $60,000 | $60,000 | $60,000 |
Less: the amount by which | |||
(b)(i) above | $90,000 | $60,000 | $35,000 |
exceeds (b)(ii) above | 55,000 | 25,000 | NIL |
$35,000 | $35,000 | $35,000 | |
Capital cost of replacement building | $25,000 | $25,000 | $25,000 |
(3) Application of subsection 13(4)
| (A) (B) (C) | |
|---|---|
(a) Building proceeds under F of the definition of UCC in subsection 13(21) | |
(i) Otherwise determined (subsection 44(6) not applicable) | $25,000 |
Less: UCC of class | 15,000 |
Amount under subparagraph 13(4)(c)(i) | $10,000 |
(ii) Amount used to acquire replacement | $60,000 |
(iii) Proceeds otherwise determined | $25,000 |
Less: lesser of (i) and (ii) | 10,000 |
Proceeds under F of the definition of UCC in subsection 13(21) | $15,000 |
(b) Deemed proceeds in replacement class | |
Amount of reduction in (a)(iii) above | $10,000 |
(4) Computation of UCC under subsection 13(21) at March 31, 2000
| Former Property Class | Replacement Property Class | |
|---|---|---|
(a) Capital cost | $90,000 | $25,000 |
(b) Depreciation allowed | (75,000) | NIL |
(c) Proceeds | (15,000) | (10,000) |
NIL | $15,000 |
(5) Comparison of Tax Results
| No Election (1) | Election (A) | Election (B) | Election (C) | |
|---|---|---|---|---|
(a) Capital gain | ||||
(i) Land | $90,000 | NIL | NIL | $25,000 |
(ii) Building | NIL | $55,000 | $25,000 | NIL |
(b) Cost of replacement land | $40,000 | $40,000 | $10,000 | $$10,000 |
(c) Capital cost of replacement building | $60,000 | $25,000 | $25,000 | $25,000 |
(d) Recapture of CCA | $10,000 | NIL | NIL | NIL |
(e) UCC | ||||
(i) Former property class | NIL | NIL | NIL | NIL |
(ii) Replacement property class | $60,000 | $15,000 | $15,000 | $15,000 |
(1) The column shows the results that would occur if there were neither an election under subsection 13(4) and 44(1) nor subsection 44(6).
Explanation of Changes
Introduction
The purpose of the Explanation of Changes is to give the reasons for the revisions to an interpretation bulletin. It outlines revisions that we have made as a result of changes to the law, as well as changes reflecting new or revised departmental interpretations.
Reasons for the Revision
We have revised the bulletin to reflect changes to the Income Tax Act resulting from S.C. 1999, c. 22 (formerly Bill C-72) and S.C. 2001, c. 17 (formerly Bill C-22).
Legislative and Other Changes
¶ 1 was revised to reflect the amendment to subsection 44(1) that the replacement property provisions do not apply to shares of the capital stock of a corporation. These amendments apply to shares disposed of after April 15, 1999, subject to transitional relief for shares disposed of after that day as a consequence of a public takeover bid or offer filed with a public authority before April 16, 1999. A comment was also added to reflect that a reference in the bulletin to former property includes a former business property.
¶ 2(c) was revised to add specific comments regarding the period in which a replacement property must be acquired for a former property that is eligible capital property.
¶ 5 was revised to remove comments regarding the application of subparagraph 44(1)(e)(iii) for taxation years ending before February 21, 1994.
¶ 14 was revised to reflect the amendments to paragraphs 44(5)(c) and 13(4.1)(c). New paragraphs 44(5)(c) and 13(4.1)(c) reproduce the effect of the existing paragraphs and new paragraphs 44(5)(d) and 13(4.1)(d) add a new requirement that where the former property was a taxable Canadian property other than treaty-protected property, the replacement property must be as well.This amendment is applicable to dispositions that occur in taxation years ending after 1997.
¶ 15 discusses the requirement in paragraphs 13(4.1)(a), 14(7)(a) and 44(5)(a) that it be reasonable to conclude that the acquired property was acquired to replace the former property. As announced at the 2002 Canadian Tax Foundation (CTF) Conference, this paragraph is being amended to emphasize that there must be a correlation or causal relationship between the acquisition of the new property and the disposition of the old property. As a result, the statement regarding business expansions has been removed and the example has been clarified. A complete copy of our comments at the 2002 CTF Conference has been published in Income Tax Technical News No. 25.
Throughout the bulletin, we have made minor changes for clarification or readability purposes.
Link to source:http://www.arc-cra.gc.ca/E/pub/tp/it259r4/it259r4-e.html