2019-0824481C6 2019 CTF - Q14 - Replacement Property Rules

Principal Issues: Can property that is acquired in advance of the disposition of the former property qualify as a replacement property?

Position: Provided the other requirements are met, yes.

Reasons: See below.

Author: Ross, Matthew
Section: 13(4), 13(4.1), 44(1), 44(5), 54, 248(1)

2019 CTF Annual Conference

CRA Roundtable

Question 14: Replacement Property Rules - property acquired in advance

The replacement property rules in section 44 permit a taxpayer to defer taxation on any capital gain realized on the disposition of a former property where it is replaced by a replacement property in accordance with the rules in section 44.

Consider this example: A manufacturer owns a plant. It needs to expand its operations and cannot do so on its current property. It acquires a piece of vacant land and proceeds to obtain approvals and to build a new plant. This process can take time, say three years from the date on which the vacant land is purchased to the date on which the property is available for use. The manufacturer moves its operations from the former property to the new property, and eight months after the move to the new property, sells the former property.

Can the CRA confirm that a property that is acquired in advance of the disposition of the former property can qualify as a replacement property?

CRA Response

Generally speaking, subsections 13(4) and 44(1) of the Act 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.

To be considered a replacement property, a particular property must meet all the conditions outlined in subsections 13(4.1) and 44(5). One of the conditions requires that it be reasonable to conclude that the property was acquired by the taxpayer to replace the former property. To satisfy this requirement, 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. The fact that a property is purchased under a business expansion would not, in and of itself, mean that the property could not be considered a replacement property.

In the case of voluntary dispositions, clause 13(4)(c)(ii)(B) and paragraph 44(1)(d) require that the taxpayer acquire the replacement property before the later of the end of the first taxation year following the initial year and 12 months after the end of the initial year. For purposes of the replacement property rules, the initial year is the tax year in which an amount has become receivable as proceeds of disposition for the former property. There is no requirement in the Act that the replacement property be acquired after the former property is disposed of, as long as it otherwise meets the conditions for being a replacement property.

Thus, while it remains a question of fact, the acquisition of a new property in advance of the disposition of the former property will not, in and of itself, preclude the new property from being a replacement property of the former property.

Matthew Ross
2019-082448
December 3, 2019

All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without the prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5.

© Her Majesty the Queen in Right of Canada, 2020

Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistribuer de l'information, sous quelque forme ou par quelque moyen que ce soit, de façon électronique, mécanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.

© Sa Majesté la Reine du Chef du Canada, 2020