2022-0951441E5 Replacement Property – Undivided Interest

Principal Issues: Where a taxpayer acquires an undivided interest in a particular property, whether the particular property can qualify as a "replacement property”, as defined by subsections 13(4.1) and 44(5) of the Act?

Position: Question of fact.

Reasons: Due to the broad definition of “property” in subsection 248(1) of the Act, the fact that a particular property consists of an undivided interest will not preclude it from meeting the definition of “replacement property” in subsections 13(4.1) and 44(5), provided the other conditions in the definitions are satisfied.

Author: Neave, Troy
Section: 13(4), 13(4.1), 44(1), 44(5), 54 "capital property", 248(1) “Property"

XXXXXXXXXX                                                             2022-095144
                                                                                     Troy Neave

February 21, 2024

Dear XXXXXXXXXX:

Re: Replacement Property – Undivided Interest

We are writing in response to your letter dated September 3, 2022, wherein you requested our views on whether, for purposes of the replacement property rules in subsections 13(4) and 44(1) of the Income Tax Act (the “Act”), a particular property could be considered a replacement property if the nature of ownership is an undivided interest. In the scenario provided, a taxpayer owns real property in British Columbia that is used in an active business. The taxpayer disposes of the property and acquires an undivided interest in a new real property. We apologize for the delay in responding to your request.

Our Comments

This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of a particular transaction proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R12, Advance Income Tax Rulings and Technical Interpretations.

The replacement property rules are found in subsection 13(4) of the Act in respect of depreciable property and subsection 44(1) of the Act in respect of capital property. They permit a taxpayer to elect to defer the recognition of income or capital gains in the case of a qualifying disposition (footnote 1) where a replacement property is acquired within a certain time period.

To be considered a replacement property, a particular property must meet the requirements outlined in subsections 13(4.1) or 44(5) of the Act. Very generally, a property is considered a replacement property for a former property if it is a “capital property” (footnote 2) of a taxpayer that was acquired to replace the former property and there is a causal relationship between its acquisition and the disposition of the former property. In addition, the property must be acquired and used for a use that is the same or similar to the use to which the former property was put. Furthermore, the property must be acquired for the purpose of gaining or producing income from the same or a similar business as the former property. More information on the replacement property rules can be found in Income Tax Folio S3-F3-C1, Replacement Property available on the Canada.ca website.

The definition of “property” in subsection 248(1) of the Act is very broad and could include an undivided interest in real property. Thus, while the determination of whether a particular property is a replacement property remains a question of fact, it is our view that a property that consists of an undivided interest in a capital property could be a replacement property for a former property.

We trust our comments will be of assistance.

Yours truly,

Matthew Ross, CPA, CA
Acting Manager
Business Income and Capital Transactions
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 Where a former property is involuntarily disposed of or a former property that is a “former business property,” as defined in subsection 248(1) of the Act, is voluntarily disposed of.

2 The definition of capital property in section 54 of the Act includes both depreciable property and any property (other than depreciable property), any gain or loss from the disposition of which would, if the property were disposed of, be a capital gain or a capital loss, as the case may be, of the taxpayer.

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