30 October 2008 External T.I. 2008-0269671E5 - Rectification orders

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Whether CRA will assess certain transactions as was intended by the parties where the legal documents executed in respect of the transactions do not accurately reflect those intentions.

Position: None taken.

Reasons: General comments only.

XXXXXXXXXX 								2008-026967
									Tim Fitzgerald, CGA
October 30, 2008

Dear XXXXXXXXXX ,

Re: Rectification of sales transactions

This is further to your letter of February 11, 2008 concerning the disposition of a condo unit ("condo").

Based on the limited information gleaned from your letter, we understand the situation to be as follows:

1. XXXXXXXXXX and XXXXXXXXXX are related to each other.

2. XXXXXXXXXX owned a condo.

3. A purchase agreement dated XXXXXXXXXX was prepared by the lawyer whereby XXXXXXXXXX sold the condo directly to XXXXXXXXXX for a sum of $XXXXXXXXXX . We presume that this transaction closed and the condo was registered in the name of XXXXXXXXXX .

4. You mention in your letter that the purchase agreement in 3 above did not reflect the actual intention of the parties. The intention was that first XXXXXXXXXX would sell the condo to XXXXXXXXXX at fair market value, which you believe was $XXXXXXXXXX at that time, and then, immediately thereafter, XXXXXXXXXX would resell the property to XXXXXXXXXX for proceeds of disposition equal to $XXXXXXXXXX .

5. On the books of XXXXXXXXXX , the $XXXXXXXXXX payment for the condo was recorded as a credit to XXXXXXXXXX shareholder loans account.

You have asked whether for tax purposes, the CRA would be willing to ignore the purchase/sale agreement between XXXXXXXXXX dated XXXXXXXXXX and assess instead, in accord with the intentions of the parties as described in 4 above.

Our Comments

As explained in Information Circular 70-6R5, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. Where the situation involves specific taxpayers and completed transactions, all relevant facts and documentation should be submitted to the appropriate Tax Services Office for their views. The situation you described is one that should be referred to the local tax office for their opinion. However, we offer the following general comments.

As a general rule, the CRA cannot ignore legally valid documents entered into by parties to a transaction and the legal rights that they create in order to assess the tax consequences of such transactions. Auditors have no choice but to assess on the facts present at the time of assessment or audit. Where the documents do not reflect the true intentions of the parties, the parties may be able to apply for a rectification order as discussed in Income Tax Technical News ITTN-22, which can be viewed on the CRA website at http://www.cra-arc.gc.ca/E/pub/tp/itnews-22/itnews-22-e.html.

Sincerely,

Sandy Parnanzone
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy & Regulatory Affairs Branch