http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/100807/index.do 
Livingston v. The Queen (January 21, 2015 – 2015 TCC 24, Lyons J.).
Précis: Mr. Livingston jointly owned a farm with his mother. When she died acreage had to be sold, including acreage owned by him personally, to settle the estate. He used part of his proceeds on the sale of the land to purchase the assets (personal property) used in the farming business. His accountant treated that purchase as “replacement property”. The sole question before the Court was whether that personal property could be regarded as replacement property for the real property sold for the purposes of the
Income Tax Act (the “Act”) therefore allowing a deferral of the capital gain on the sale of his acreage. The Court concluded that the the personal property acquired could not reasonably be said to replace the real property sold by Mr. Livingston. The appeal was dismissed with costs.
Decision: This is an example of a very familiar situation in the case of family-owned farms. Mr. Livingston jointly owned the farm with his mother. When she died acreage had to be sold, including acreage owned by him personally, to settle the estate. He used part of his proceeds on the sale of the land to purchase the assets used in the farming business. His accountant treated that purchase as “replacement property”. The sole question before the Court was whether that personal property could be regarded as replacement property for the real property sold for the purposes of the Income Tax Act (the “Act”) therefore allowing a deferral of the capital gain on the sale of his acreage:
[1] This is an appeal by Paul Livingston, the appellant, from a reassessment of his 2006 taxation year relating to an increase to the taxable capital gain in respect of the sale of his interest in land described as Part 1, situated in Brampton, Ontario. The Minister of National Revenue reassessed based on his determination that farm assets (non-real property), acquired following the sale of the appellant’s interest in land, did not constitute “replacement property” within the meaning of subsection 44(5) of the
Income Tax Act, R.S.C. 1985, c.1 (5th Supp.) (the “Act”).
[2] The appellant, a farmer, operated the dairy Farm Business on the Farmland Property with his mother prior to her death. They each owned one-half interest in the Farmland Property. He and his six siblings entered into agreements with trustees of his mother’s estate (the “Estate”) to settle the Estate.
[3] The Farmland Property was subsequently severed into three parts to facilitate the sale of Part 1 (“Total Land Sold”) to a third party land developer to settle the Estate. The Total Land Sold included eight acres the appellant had beneficially owned. Of the eight acres, he used the proceeds from the sale of 3.2 acres interest in land (the “farmland” and also identified as the Extra Portion), to satisfy the Promissory Note he had given to the Estate in order to purchase the remaining one-third interest in the Farm Business.
[4] The Farm Business comprised livestock, farm equipment, feed, grain, growing crops, the bank account and the milk quota (the “Assets”), all of which had been used in the Farm Business when he operated it with his mother.
[5] The appellant elected under subsection 44(1) of the Act to defer the capital gain on the sale of the farmland, which would otherwise be included in income, and claims that the Assets constitute “replacement property”.
[6] The issue in this appeal is whether the Assets acquired by him qualify as “replacement property”, within the meaning of subsection 44(5) of the Act, for the farmland sold.
[Footnotes omitted]
The positions of the Mr. Livingston and the Respondent were essentially diametrically opposed:
[23] The appellant’s position is that the Assets constitute “replacement property” for the farmland sold because the Assets are inextricably linked to the dairy Farm Business. This is demonstrated by the sale of the farmland and that the purchase of the Assets were interconnected with causality of that sale and the obligation of the Estate to sell the Assets to the appellant. Further, there is no explicit requirement in section 44 that a former business property must be replaced with the same type of property except that it be capital property.
[24] The respondent’s position is that the Assets – being fundamentally different in nature than the farmland – do not qualify as “replacement property” as the words “to replace” within the meaning of paragraph 44(5)(a) means a direct substitution of land for land in the present appeal. Therefore, it is not reasonable to conclude that the Assets were acquired to replace the farmland. Further, since the farmland, as part of the Total Land Sold, was immediately leased back to the appellant by the developer, there was no change or substitution for the farmland.
The relevant provision was subsection 44(5) of the Act:
44(5) Replacement property. For the purposes of this section, a particular capital property of a taxpayer is a replacement property for a former property of the taxpayer, if
(a) it is reasonable to conclude that the property was acquired by the taxpayer to replace the former property;
(a.1) it was acquired by the taxpayer and used by the taxpayer… for a use that is the same as or similar to the use to which the taxpayer … put the former property;
(b) where the former property was used by the taxpayer … for the purpose of gaining or producing income from a business, the particular capital property was acquired for the purpose of gaining or producing income from that or a similar business… for such a purpose.
The Court concluded that the Assets (i.e., the personal property acquired) could not reasonably be said to replace the real property sold by Mr. Livingston:
[40] When paragraph 44(5)(a) was added to the existing requirements in subsection 44(5), it specifies that reasonableness is to be considered as to whether the acquired property was to replace the former property. Thus would an objective and knowledgeable observer, with judgment, conclude that the Assets were purchased as a direct substitute for the farmland.
[41] The appellant argues that all that is required is some correlation or interconnectedness between the Assets and the farmland which are inextricably linked by virtue of the Assets being used in the exact same dairy Farm Business for the purpose of earning income. The sale of the farmland and the purchase of the Assets supports that interconnection. The appellant’s submission on this paragraph is broader and more expansive and conflates the requirements in each of paragraphs 44(5)(a) and (a.1) and likely (b), without focussing more directly on the elements within that paragraph.
[42] In my opinion, given the differences as between the Assets and the farmland and considering the wider context, encompassing its historical evolution and in line with the statutory regime providing for specific rules for specific types of property, 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.
As a result the appeal was dismissed with costs to the Respondent.
Comment: This seems to be an unfortunate decision. There appears to be a clear public policy in the Act aimed at preserving the family farm, where possible. Where real and personal property are used in the same farming business is it helpful to draw a line of demarcation between the two for the purposes of the replacement property rules? What would the result be if the farmland were leased? It would be helpful if the Federal Court of Appeal could turn its attention to this decision.