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: Withdrawal of request for Advance Income Tax Ruling.
Position: See below.
Reasons: See below.
XXXXXXXXXX
2012-046336
XXXXXXXXXX, 2013
Dear XXXXXXXXXX:
Re: XXXXXXXXXX
Advance Income Tax Ruling Request
This is further to your email dated XXXXXXXXXX wherein you requested the withdrawal of the above-noted Advance Income Tax Ruling request dated XXXXXXXXXX.
Unless otherwise stated, every reference herein to a provision is a reference to the relevant provision of the Income Tax Act (hereinafter the "Act").
The XXXXXXXXXX (hereinafter "NPO") sold its assets to XXXXXXXXXX for a consideration of $XXXXXXXXXX. The asset purchase agreement was signed on XXXXXXXXXX with an effective date of XXXXXXXXXX and a closing date of XXXXXXXXXX. NPO's taxation year end is XXXXXXXXXX.
It was your understanding that once a not-for-profit organization ceases to be a not-for-profit organization, the organization is subject to the rules provided under subsection 149(10) and more particularly is deemed to have disposed of its assets at fair market value (hereinafter "FMV") pursuant to paragraph 149(10)(b). In fact, you believe this realization occurred when the board of directors of NPO approved the recommendation to sell NPO's assets on XXXXXXXXXX.
As a result of the actual sale of assets occurring only months after the deemed disposition, it was your position that NPO would only record the one transaction (i.e. the actual transaction that closed on XXXXXXXXXX) as the FMV of NPO's assets would not have fluctuated in those few months.
It was your interpretation of the Act that: 1) NPO would be able to use the non-capital losses carried forward to apply against the taxable income resulting from the sale of the NPO's assets; and 2) NPO would be able to make an election for a capital dividend under subsection 83(2).
You were requesting rulings on the tax implications to NPO on the sale of its assets. More specifically you were requesting rulings on the following:
1) The ability of NPO to only report one transaction related to the sale of its assets. As opposed to reporting the deemed disposition and the actual disposition which would produce the same results.
2) The ability of the Company to use its non-capital losses (approximately $XXXXXXXXXX) against the taxable income from the sale of the assets.
3) The ability to make an election for a capital dividend under subsection 83(2) related to the capital gains on the sale of the assets.
You have decided to withdraw your request because, in a telephone conversation on XXXXXXXXXX (XXXXXXXXXX), we provided you with the following comments:
1) It is a question of fact to determine at what time a particular corporation ceases to be exempt from tax under Part I and, consequently, at what time the rules provided under subsection 149(10) would apply to that corporation in a particular situation.
The position of the Canada Revenue Agency is that, in general, a particular corporation ceases to be exempt from Part I tax pursuant to paragraph 149(1)(l) at the time it no longer complies with the requirements of this provision (XXXXXXXXXX).
In our view, generally, a deemed disposition of property under paragraph 149(10)(b) at a particular time and the actual sale of the assets by a corporation after that time are two different events that must be reported separately for tax purposes.
2) Pursuant to paragraph 149(10)(c), where, at any time a corporation ceases to be exempt from tax under Part I on its taxable income, for the purposes of applying, among other things, section 111 to the corporation, the corporation is deemed to be a new corporation the first taxation year of which began at that time.
Consequently, the losses incurred when NPO was exempt from tax under Part I could not be carried forward to a taxation year following its last taxation year as an exempt entity.
3) Subsection 89(1.2) provides that where at any particular time after November 26, 1987 a corporation ceases to be exempt from tax under Part I on its taxable income, in computing the corporation's capital dividend account at and after the particular time there shall be deducted the amount of the corporation's capital dividend account immediately after the particular time.
As such, a corporation that ceases to be exempt from tax under Part I at a particular time will have a nil balance in its capital dividend account at and after that particular time.
Accordingly, NPO would have no capital dividend account and consequently would be unable to make a valid election under subsection 83(2) in the particular situation.
We have, as instructed, closed our file.
An invoice for the time spent considering this Advance Income Tax Ruling request will be forwarded to you under separate cover.
Yours truly,
XXXXXXXXXX
for Division Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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