Subsection 44(1) - Exchanges of property
Cases
Macklin v. The Queen, 92 DTC 6595 (FCTD)
In August 1979 the taxpayer decided that she wished to have a portion of a farm then owned by her husband developed as a housing subdivision. In October 1979 top soil was stripped from approximately 60 acres, in January 1980 a joint venture agreement between a real estate developer and the family corporation was signed, on April 2, 1980 (the date of her husband's death) the taxpayer acquired the beneficial ownership of the lands and sometime between April 11, 1980 and May 23, 1980 the land was disposed of to the joint venture. In finding that the lands in question including the 60 acres constituted a former business property "immediately before" their disposition, notwithstanding that after being stripped of the top soil the 60 acres could be no longer utilized as farm land, Rothstein J. stated (p. 6602):
"... The word 'immediately' must be capable of an interpretation broader than 'instantly', that is an interpretation connoting 'closely' or 'proximately'. Otherwise, an interim renting of property or property sitting idle pending disposition would disqualify the taxpayer from availing herself of the replacement property rules."
Hawkins v. The Queen, 91 DTC 5502 (FCTD)
Joyal J. found that although "no particular formality would be required in order to meet the election requirements under section 44" (p. 5505), here it could not be said that the taxpayer had made the election when she had reported to Revenue Canada neither the disposition of her farming property nor the acquisition of the other farm which she had received in exchange.
Mintenko v. The Queen, 88 DTC 6537, [1989] 1 CTC 40 (FCTD)
An amended schedule filed under cover of an accountant's letter dated May 31, 1982 was sufficient notification to Revenue Canada of the purchase by the taxpayer of a replacement property in his 1981 taxation year. [C.R.: 85(1)]
Administrative Policy
4 March 2015 T.I. 2014-0550761E5 F - 44(1) et disposition partielle
A portion of a building was destroyed by fire, with a portion of the insurance proceeds used to reconstruct it. Although the building generated both property and business income, the portion of the building in question was only used in a business. CRA stated (TaxInterpretations translation):
[T]he compensation payable to the corporation under the insurance policy appear to come within paragraph (f) of the definition of "proceeds of disposition" in section 54… .
[I]t is thus necessary to determine if the damages received were, within a reasonable period, expended for repairing damages caused to the property. If that is the case, paragraph 12(1)(f) provides that the compensation received will be included in the computation of the income of the taxpayer… .
[T]he portion of the building which was destroyed by fire was used in its totality to earn income from a business and therefore conformed with the definition of a former business property. If in the light of the damages for the building and the scale of the work to be effected it turns out that a new property is acquired by the taxpayer, section 44 can apply … .
23 December 2014 T.I. 2014-0551841E5 - Subsections 44(1) and 69(11) of the Act
Would proceeds of disposition deemed to arise by s. 69(11) be considered an amount that has become receivable by the taxpayer as proceeds of disposition for purposes of the replacement property rules in s. 44(1)? After referring to the qualified farm property deduction under s. 110.6(2) by a non-affiliated transferee as an example where s. 69(11) could apply, CRA stated (TaxInterpretations translation):
While subsection 69(11) does not specifically deem the taxpayer to have an amount receivable as proceeds of disposition (when it applies), the CRA will generally accept that this will not, in and by itself, prevent a taxpayer from making an election to have the replacement property rules in subsection 44(1) apply where all the required conditions set out in section 44 are otherwise met.
21 August 1995 T.I. 951975 (C.T.O. "Proceeds of Disposition")
In response to a question concerning s. 2 of the Partition of Property Act (B.C.), RC stated "if real property is jointly owned by three taxpayers, two of them may petition the court, pursuant to section 2 of the Partition Act, to have the property sold and the proceeds distributed, despite the fact that the third person dissents to the partition ... . [T]he proceeds of disposition received by the dissenting third party would be considered to be 'compensation for property taken under statutory authority' within the meaning of paragraph 54(c) ..."
26 July 1995 T.I. 950158 (C.T.O. "Court Ordered Partition & Sale Disposition")
Where as a result of the bankruptcy of one of the four co-tenants of rental properties, a court-appointed trustee receives court approval for severance, partition and sale of the property, the non-bankrupt co-tenants would be entitled to utilize s. 44(1) in respect of their proceeds (in this case, property interests in other co-owned buildings).
18 July 1995 T.I. (C.T.O. "Expropriation")
With respect to the sale of a portion of a ranch as a result of a possible expropriation, RC noted that "a sale based on the rumour of a possible expropriation that did not include a notice of intention was held not to qualify in the Damka Lumber (90 DTC 6101)" case.
24 April 1995 T.I. 950486 (C.T.O. "Exchanges of Property")
A shareholder whose shares are acquired pursuant to s. 188 of the Business Corporations Act (Ontario) will be considered to have received his sale proceeds either as compensation for property taken under statutory authority or as the sale price of property sold to a person by whom notice of an intention to take it under statutory authority was given. Accordingly, the shareholder will be entitled to elect under s. 44(1) in respect of the disposition where the shareholder has, before the end of the second taxation year following the year of acquisition, acquired a capital property as a replacement property. A share of a corporation listed on a prescribed stock exchange in Canada would ordinarily be a replacement property in this situation.
25 July 1991 Memorandum (Tax Window, No. 7, p. 5, ¶1371)
The word "replacement" contemplates a direct substitution. Accordingly, there must be a causal relationship between the disposition of one property and the acquisition of the replacement.
87 C.R. - Q.34
There is no provision permitting the extention of the time periods set out in section 44.
Articles
Kroft, "An Update on Select Legal Issues Relating to Dispositions and Exchanges of Property", 1995 Corporate Management Tax Conference Report, c. 10.
Subsection 44(2) - Time of disposition and of receipt of proceeds
Articles
Kroft, "An Update on Select Legal Issues Relating to Dispositions and Exchanges of Property", 1995 Corporate Management Tax Conference Report, c. 10.
Paragraph 44(2)(a)
Cases
The Queen v. Shaw, 93 DTC 5121 (C.A.)
The farm lands of the taxpayer were expropriated pursuant to the Expropriation Act (Alberta) in 1977. Following the settlement in 1986 of an action against the Province of Alberta, the taxpayer received the sum of $1,020,368 which was calculated as a replacement of interest income which the plaintiff would have earned if he had been paid the full value of his land at the time of the expropriation.
With respect to the finding of the Trial Judge that because s. 44(2)(a) deemed the taxpayer to have disposed of the land in 1986, therefore there was no interest that had accrued to the taxpayer prior to that date, the Court found that s. 44(2)(a) was merely a timing provision that did not recharacterize the nature of the sum received.
Laurentide Rendering Inc. v. The Queen, 84 DTC 6153 (FCTD), aff'd 88 DTC 6331, [1988] 2 CTC 200 (FCA)
It was suggested that s. 44(2)(a) was in large part a codification of existing case law as to when expropriation proceeds are to be included in computing income.
Paragraph 44(2)(b)
See Also
Loukras v. MNR, 90 DTC 1557 (TCC)
The taxpayer's entitlement to compensation was considered to have been finally determined by a judgment of the Trial Division of the Federal Court even though a notice of appeal therefrom was subsequently filed and then discontinued.
Paragraph 44(2)(c)
Administrative Policy
11 September 1992 Memorandum (Tax Window, No. 24, p. 10, ¶2231)
Where the proceeds of disposition deemed to be receivable under s. 44(2)(c) are not determinable, Revenue Canada will seek a waiver, failing which it will reassess based on the maximum likely proceeds of disposition. The interest portion of the settlement will be treated as interest income realized at the same time.
Subsection 44(5) - Replacement property
See Also
Livingston v. The Queen, 2015 TCC 24
The taxpayer and the estate of his mother were c0-owned (as tenants-in-common) a dairy farm and as well as the livestock, farming equipment, feed, milk quota and other farming assets. All the estate's interest and a portion of the taxpayer's interest in the farmland was sold to a third party housing developer (who leased the lands back to the taxpayer pending development), with the taxpayer using the sales proceeds received by him to purchase all of the Estate (non-realty) farming assets.
Lyons J affirmed the Minister's denial to the taxpayer of the s. 44(1) rollover on this farming-asset purchase. After reviewing the legislative history, she stated (at para 42):
...I interpret the words "to replace" in paragraph 44(5)(a) to mean that Parliament intended a direct substitution so that the same species of capital property would be required for the acquired property to constitute a replacement property for the former property. I find that it cannot reasonably be concluded that the Assets were to replace the farmland within the meaning of paragraph 44(5)(a) of the Act.
This purchase also did not satisfy the requirement in para. 44(5)(a.1) that the new property be acquired for a "similar" use. Notwithstanding that "similar" is potentially broad, the use of land for growing crops or pasturing cattle is not similar to the use to which the physical assets and milk quota were put and, in particular, the milk quota was used for the sale of milk (paras. 49, 50).
Klanten Farms Ltd. v. The Queen, 2007 DTC 1095, 2007 TCC 348
The taxpayer unsuccessfully submitted that a property acquired by the taxpayer for farming was a replacement property for a property that was used to earn rental income. Paris J. also stated (at p. 1100) that:
"'Use' in paragraph 44(5)(8.1) does not ... include the notion of holding for a future use."
Depaoli v. The Queen, 96 DTC 1820 (TCC)
Prior to the expropriation of their 33-acre vacant property, which they intended to use on retirement to build a house and operate a farm, the taxpayers rented out the property for small sums to adjoining farmers. The expropriation proceeds were used, in part, to purchase two smaller vacant lots one-half a mile apart, which were intended to be used on retirement in the same manner (although this ceased to be feasible as a result of a proposed landfill site) and, in the meantime, similar farming arrangements with neighbouring farmers were utilized.
In finding that the subsequently purchased lots were replacement properties, Hamlyn TCJ. stated (at p. 1823) that the maintaining by the taxpayers "of farm land to keep it clean by arranging for farmers to cultivate, plant and harvest crops, is the 'use' of former property by the Appellants".
McKervey v. MNR, 92 DTC 1570 (TCC)
In finding that land acquired by the taxpayer for use "in the rather varied mélange of businesses that he carried on - truck dismantling, selling trucks and truck parts, trucking and the sale of building materials" - was a replacement property, Bowman J. stated (p. 1576):
"I do not think that for property to be 'used' primarily in a business it is necessary that it be used to full capacity all of the time provided that a reasonable amount of use is made of it and it is dedicated to and held in readiness for that use and provided further that it is not being put to any other significant use."
Administrative Policy
31 July 2006 TI 2005 015617 [leasehold interest included]
"The capital cost of a leasehold interest in respect of a building may qualify as a replacement property for a building that is a former business property if the definition of replacement property in subsections 13(4.1) and 44(5) is otherwise met."
27 January 2004 T.I. 2003-005326
A retirement home that is acquired to replace a motel would not be considered to be a replacement property: "a retirement home is not a property that can be put to a use that is the same as or similar to the use of a motel, nor is the business of operating a retirement home the same as or similar to the business of operating a motel."
17 June 1999 T.I. 991151
If a corporation, that has disposed of a former business property, acquires the shares of a qualified family farm corporation and winds it up pursuant to s. 88(1), the farm property received on the winding-up may serve as a replacement property for purposes of s. 44(5).
IT-259R3 "Exchanges of Property"
"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'".
30 January 1995 T.I. 5-942486 -
"The words 'replacement property' contemplate a direct substitution, such that there is a causal relationship between the disposition of the former property and the acquisition of the replacement property. Moreover, the Department has taken the position that the provisions of section 44 are not intended to encompass business expansions ... ."
31 March 1994 T.I. 933151 (C.T.O. "Replacement Property")
There is nothing in s. 44(5)(a) to require that the "former property" have produced income in the past or that the replacement property produce income in the future, and for purposes of the "use test", the use made of the former property is not restricted solely to uses that produce income from that property. However, vacant land would generally be excluded from the definition of replacement property as non-use does not constitute use.
4 September 1991 T.I. (Tax Window, No. 9, p. 23, ¶1441)
Where a business property owned by a taxpayer is used in an active business by a partnership each member of which is related to the taxpayer, the property is considered to be used by "a related person".
3 September 1991 T.I. (Tax Window, No. 8, p. 18, ¶1432)
A small hotel with a pub and restaurant that provides entertainment, liquor and food services would likely qualify as a similar business when acquired in replacement of a nightclub that provided entertainment, liquor and food services, because both operations belong to the same service industry.
21 August 1991 Memorandum (Tax Window, No. 8, p. 17, ¶1401)
Where a taxpayer acquires a new motel to replace an expropriated one, s. 44(5)(a) will not be available as the previous motel was operated by the owner and the new motel is leased to a relative.
6 June 1991 T.I. (Tax Window, No. 4, p. 22, ¶1284)
An apartment building earning residential rents may be a replacement property for a warehouse or office building which was used by the taxpayer (a partnership) to earn commercial rents. Where the original property was disposed of by the partnership, the replacement property rule will not apply unless the replacement property was acquired by the partnership and not by the individual partners.
1 February 1990 T.I. (July 1990 Access Letter, ¶1321)
Where a taxpayer in the business of operating rest homes sold the rest homes and bought a hotel, the operation of the hotel generally would not be considered to be a similar business.
Paragraph 44(5)(a.1)
Administrative Policy
13 November 2014 T.I. 2014-0535041E5 F - Bien de remplacement Location d'immeubles
A couple who co-owned various rental properties received insurance proceeds on the complete destruction of one of the properties, and purchased chalets in a resort area for rental use. Do the chalets satisfy the "same…similar use" test in s. 44(5)(a.1)? CRA responded (TaxInterpretations translation):
Even though the physical characteristics of the new properties would not be identical to those of the previous properties, the properties appear to be of the same nature (rental properties) and to be put to the same use (rental). … [T]he use made by the taxpayers of the new properties can be considered as an identical or similar use as they made of the previous property, for purposes of paragraph 44(5)(a.1).
CRA also noted that the reference in IT-259R4, para. 16(b) to the properties bearing the same physical description would be satisfied where a building was replaced by a building.
11 October 2013 APFF Roundtable Q. , 2013-0495681C6 F
ABC Inc. leased Building A to Opco, a sister corp. which used Building A in an active business. In January 2013, Building A was expropriated (with Opco moving its business to premises of an unrelated corporation). In May 2013, ABC Inc. acquired a replacement building (Building B) which it leased to an unrelated corporation for use in that tenant's active business. In confirming that the s. 44(5) replacement property rollover was not available, CRA stated (TaxInterpretations translation):
[S]ince Building B was not used by ABC Inc., or a related person, to gain income from a business in which Building A was used or a similar business, that building would not qualify… .
However, it would suffice if the person who used Building B was related to ABC Inc. and used it in the same or a similar business.
Paragraph 44(5)(b)
Administrative Policy
17 February 2014 T.I. 2014-0517491E5 F - Bien de remplacement - usages multiples
Mr. A owned a property (Building A) whose upper floors were used from residential rentals and whose ground floor was rented out to businesses including a numbered company of Mr. A. Building A was expropriated, and Mr. A wished to acquire a second property (Building B) with the same mixed use. However, in fact, neither Mr. A nor a related person carried on a business in Building B. CRA stated (TaxInterpretations translation):
… Building B is used solely to generate rental revenue. As neither Mr. A nor any person related to Mr. A will use Building B to earn income from a business…the requirements of paragraph 44(5)(b) are not satisfied. Consequently, Building B does not qualify as a replacement property… .
30 September 2004 T.I. 2004-00842 -
The replacement property rules cannot be used with respect to a sale of vacant land to a municipality given that vacant land is not "used" by the taxpayer.