2016-0632001R3 Replacement Property

Principal Issues: Will New Farmland 1 and New Farmland 2, as the case may be, each be considered as a replacement property for the Old Farmland?

Position: Yes

Reasons: Based on the facts the requirements of section 44 are met.

Author: XXXXXXXXXX
Section: 44(1); 54

XXXXXXXXXX
                                                                                                                        2016-063200

XXXXXXXXXX, 2016

Dear XXXXXXXXXX:

Re: Request for Advance Income Tax Ruling, XXXXXXXXXX

We are writing in response to your letter of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-referenced taxpayers.  This letter is based solely on the facts described below.  Any documentation submitted with your advance income tax ruling request does not form part of this letter except as expressly referred to herein, and any references thereto are otherwise provided solely for the convenience of the reader.

To the best of your knowledge and that of the above-referenced taxpayer, none of the issues involved in this ruling is:

i)    dealt with in an earlier return of any of the above-referenced taxpayer, or a related person,

ii)   being considered by a Tax Services Office or Taxation Centre in connection with a previously filed tax return of the above-referenced taxpayer or a related person,

iii)  under objection or appeal by the above-referenced taxpayers, or a related person,

iv)   before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired, or

v)    the subject of a ruling previously issued by the Income Tax Rulings Directorate.

You have also advised that to the best of your knowledge, and that of the above-referenced taxpayers, the proposed transactions will not result in any of the taxpayers being unable to pay their existing outstanding tax liabilities.

Unless otherwise stated, all references herein to a part, section, subsection, paragraph or subparagraph, clause or subclause is a reference to the relevant provision of the Income Tax Act, R.S.C. 1985 (5th Suppl.) c.1, (the “Act”) as amended, and the regulations thereunder are referred to as the “Regulations” and all references to monetary amounts are in Canadian dollars.

DEFINITIONS

In this letter the following terms have the meanings specified:

a)    “arm’s length” has the meaning assigned by subsection 251(1);

b)    “BN” means the business number assigned to the particular entity by CRA;

c)    “capital property” has the meaning assigned by section 54;

d)    “Farmco” means XXXXXXXXXX;

e)    “former property” has the meaning assigned by subsection 44(1);

f)    “New Farmland 1” means the parcel of land described in Paragraph 7;

g)    “New Farmland 2” means the parcel of land described in Paragraph 8;

h)    “Old Farmland” means the parcel of land described in Paragraph 4;

i)    “Paragraph” means a numbered paragraph in this letter;

j)    “Proposed Transactions” means the transactions described in Paragraphs 9 to 12;

k)    “related persons” has the meaning assigned to that term in subsection 251(2);

l)    “replacement property” has the meaning assigned by subsection 44(5);

m)    “SIN” means a Canadian social insurance number;

n)    “taxable Canadian corporation” has the meaning assigned by subsection 89(1);

o)    “Taxpayer 1” means XXXXXXXXXX; and

p)    “Taxpayer 2” means XXXXXXXXXX.

FACTS

1.    Farmco is a taxable Canadian corporation that was incorporated pursuant to the laws of the Province of XXXXXXXXXX.  Farmco files its tax returns with the XXXXXXXXXX Tax Centre and it deals with the XXXXXXXXXX Tax Services Office.

2.    The shareholders of Farmco are as follows:

Taxpayer 1 – XXXXXXXXXX Class “XXXXXXXXXX” voting common shares
Taxpayer 2 – XXXXXXXXXX Class “XXXXXXXXXX” voting common shares
Taxpayer 1 – XXXXXXXXXX Class “XXXXXXXXXX” non-voting preferred shares
Taxpayer 2 – XXXXXXXXXX Class “XXXXXXXXXX” non-voting preferred shares

Taxpayer 1 and Taxpayer 2 are spouses who are related persons and residents of Canada for the purposes of the Act.  Farmco is related to each of Taxpayer 1 and Taxpayer 2.

3.    Farmco carries on a XXXXXXXXXX farming business in XXXXXXXXXX.  Prior to the expropriation of the Old Farmland described below, Farmco carried on its XXXXXXXXXX farming business in Canada using three parcels of farmland located in XXXXXXXXXX which totaled XXXXXXXXXX acres.  The three parcels of farmland are as follows: the Old Farmland; a XXXXXXXXXX acre parcel of land which Farmco rents from an arm’s-length party; and a XXXXXXXXXX acre parcel of land that Farmco has owned since XXXXXXXXXX.  Farmco continues to carry on its XXXXXXXXXX farming business on the XXXXXXXXXX acre parcel of rented land and the XXXXXXXXXX acre parcel of land it owns.

4.    The Old Farmland is a XXXXXXXXXX acre parcel of farmland that was purchased by Taxpayer 1 and Taxpayer 2 in XXXXXXXXXX for $XXXXXXXXXX.  The Old Farmland was used by Farmco in its XXXXXXXXXX farming business until XXXXXXXXXX when it was expropriated by the XXXXXXXXXX.  The Old Farmland was jointly owned (50:50) by Taxpayer 1 and Taxpayer 2 as capital property and is considered to be a former property.

5.    In XXXXXXXXXX, the Government of XXXXXXXXXX paid Taxpayer 1 and Taxpayer 2 approximately $XXXXXXXXXX as compensation for the expropriation of the Old Farmland.  Taxpayer 1 and Taxpayer 2 sued the Government of XXXXXXXXXX and upon the final settlement of the lawsuit in XXXXXXXXXX they received an additional $XXXXXXXXXX as compensation for the expropriation of the Old Farmland.  Taxpayer 1 and Taxpayer 2 each reported a capital gain and taxable capital gain from the disposition of the Old Farmland in their respective XXXXXXXXXX T1 Income Tax and Benefit Return.

6.    Taxpayer 1 and Taxpayer 2 had always intended to expand Farmco’s farming operations and/or replace the rented land with additional owned land if and when suitable land and finances became available.  As a consequence of the expropriation of the Old Farmland and the final settlement of the lawsuit in XXXXXXXXXX, Taxpayer 1 and Taxpayer 2 now intend to replace the Old Farmland on or before the end of XXXXXXXXXX with the two new parcels of land that are located close to, or adjacent to, the two parcels of land currently used by Farmco.

7.    New Farmland 1 is a XXXXXXXXXX acre parcel of land that is located XXXXXXXXXX kilometers from the Old Farmland, and adjacent to the parcel of farmland currently owned by Farmco.  New Farmland 1 is currently owned by a person who deals at arm’s length with Taxpayer 1 and Taxpayer 2.

8.    New Farmland 2 is a XXXXXXXXXX acre parcel of land that is located in XXXXXXXXXX.  New Farmland 2 is currently owned by a person who deals at arm’s length with Taxpayer 1 and Taxpayer 2.

PROPOSED TRANSACTIONS

9.    Taxpayer 1 and Taxpayer 2 will acquire New Farmland 1 for an aggregate purchase price of $XXXXXXXXXX on or before XXXXXXXXXX.  Taxpayer 1 and Taxpayer 2 will own New Farmland 1 jointly (50:50).

10.   Taxpayer 1 and Taxpayer 2 will acquire New Farmland 2 for an aggregate purchase price of $XXXXXXXXXX place on or before XXXXXXXXXX.  Taxpayer 1 and Taxpayer 2 will own New Farmland 2 jointly (50:50).

11.   New Farmland 1 and New Farmland 2 will be used by Farmco in its XXXXXXXXXX farming business.

12.   Taxpayer 1 and Taxpayer 2 will each make the required election under subsection 44(1) in their respective XXXXXXXXXX T1 Income Tax and Benefit Return, being for greater certainty, the taxation year in which New Farmland 1 and New Farmland 2 will be acquired by them as replacement properties for the Old Farmland.

PURPOSE OF THE PROPOSED TRASACTIONS

The purpose of the Proposed Transactions is replace the Old Farmland with New Farmland 1 and New Farmland 2 to ensure that Farmco will have a sufficient land to continue to carry on its XXXXXXXXXX farming business, to expand that business, and to allow Taxpayer 1 and Taxpayer 2 to utilize the proceeds of disposition they received from the expropriation of the Old Farmland to the greatest extent possible in deferring or reducing any capital gain they each otherwise realized from the disposition of the Old Farmland in XXXXXXXXXX.

RULING GIVEN

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purposes of the proposed transactions, and provided further that the proposed transactions are completed in the manner described above, we rule as follows:

A.    Provided each of Taxpayer 1 and Taxpayer 2 make an election under subsection 44(1) in respect of the acquisition of New Farmland 1 and New Farmland 2, as described in Paragraphs 9 and 10, within the time limit set out in paragraph (c) of that subsection, each of New Farmland 1 and New Farmland 2 will be considered as a replacement property for the Old Farmland.

Our ruling is given subject to the limitations set out in Information Circular 70-6R6 dated August 29, 2014, and are binding on the CRA provided the Proposed Transactions are completed on or before XXXXXXXXXX.  Our ruling is based on the law as it currently reads and does not take into account any proposed amendments to the Act or Regulations.

Unless otherwise confirmed in the above ruling, nothing in this letter should be construed as implying that the CRA has confirmed, reviewed or has made any determination in respect of the adjusted cost base or fair market value of any property referred to herein; or any other tax consequence relating to the Facts, Proposed Transactions or any transaction or event taking place either prior to the Proposed Transactions or subsequent to the Proposed Transactions, whether described in this letter or not.

Yours truly,

XXXXXXXXXX
Manager
Business Income and Capital Transaction Section
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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