1999 Ruling 9832613 - SPECIFIED LEASING PROPERTY

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: Whether the sale of leased property to an arm's length person would cause the property to become specified leasing property.

Position: No. Not considered to be a material change to the lease.

Reasons: Grandfathering rule for leases entered into prior to XXXXXXXXXX.

XXXXXXXXXX
XXXXXXXXXX 983261
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1999

Dear Sirs:

Re: XXXXXXXXXX
XXXXXXXXXX ("Purchaser 1")
XXXXXXXXXX ("Purchaser 2")
XXXXXXXXXX ("Purchaser 3")
XXXXXXXXXX ("Purchaser 4")

This is in response to your letter of XXXXXXXXXX, requesting an advance income tax ruling on behalf of the above-noted taxpayers. We also acknowledge your subsequent letters of XXXXXXXXXX.

We understand that to the best of your knowledge and that of the taxpayers involved none of the issues involved in this ruling is being considered by a Tax Services Office or a Taxation Centre in connection with any tax return already filed, and none of the issues involved in the requested rulings is the subject of any notice of objection or is under appeal.

In this letter "the Act" means the Income Tax Act, RSC 1985, Fifth Supplement, c.1, as amended from time to time.

FACTS

1. XXXXXXXXXX is a corporation incorporated under the laws of XXXXXXXXXX and is a subsidiary of XXXXXXXXXX also incorporated under the laws of XXXXXXXXXX.

2. XXXXXXXXXX is a corporation incorporated under the laws of Canada. XXXXXXXXXX purchased certain property (the "Leased Property") and, pursuant to the agreements described in paragraph 3, leased such property to the parties described in paragraph 3, all of whom it deals with at arm's length.

3. The Leased Property consists of the following property:

(i) XXXXXXXXXX;

(ii) XXXXXXXXXX;

(iii) XXXXXXXXXX;

(iv) XXXXXXXXXX;

(v) XXXXXXXXXX;

(a) XXXXXXXXXX;

(b) XXXXXXXXXX;

(c) XXXXXXXXXX;

(d) XXXXXXXXXX;

XXXXXXXXXX.

4.

XXXXXXXXXX.

5. A XXXXXXXXXX% interest in the XXXXXXXXXX Equipment and the Manufacturing Equipment and the Leases relating thereto have been transferred by XXXXXXXXXX to a general partnership comprised of XXXXXXXXXX (the "XXXXXXXXXX Partnership"). XXXXXXXXXX and the XXXXXXXXXX Partnership may effect further transfers of the Leased Property and the Leases to other corporations under the control of XXXXXXXXXX, however no material change will be made to any of the Leases prior to the purchase of the Leased Property described in the Proposed Transactions.

6. As a result of the Leases having been entered into prior to XXXXXXXXXX and there having been no material changes made to the Leases prior to the date hereof, the Leased Property is currently not specified leasing property within the meaning of section 1100(1.11) of the Income Tax Regulations.

PROPOSED TRANSACTIONS

7. XXXXXXXXXX wishes to purchase the Leased Property from the owners of the Leased Property (the "Sellers") and obtain an assignment of the rights under each of the Leases. The basis on which such transactions are to proceed is outlined in a term sheet dated XXXXXXXXXX and signed on XXXXXXXXXX, as well as a Purchase agreement dated XXXXXXXXXX.

8. XXXXXXXXXX has incorporated the XXXXXXXXXX Purchasers to purchase the Leased Property. Each Purchaser is a direct or indirect subsidiary of

XXXXXXXXXX.

9. Each Purchaser will initially be capitalized by contributions of debt and equity from XXXXXXXXXX. Once the Leased Assets are acquired, XXXXXXXXXX intends to arrange third party financing from arm's length lenders based on the value of the Leased Property and the Leases held by each Purchaser. Such third party financing may involve the granting of security over the Leased Property and/or the rental payments under the Leases in favour of such third party lenders.

10. Under the Purchase Agreement, each Purchaser will purchase the Leased Property to be acquired by it and will be assigned and will assume the rights and obligations under the Leases pertaining to such property. Certain ancillary agreements and collateral security will be transferred to the Purchaser along with the Leased Property. Each Purchaser will indemnify and save the respective Seller harmless against any claims made by a Lessee under a Lease of the Leased Property arising after the purchase. XXXXXXXXXX will guarantee the performance by the Purchaser of all such indemnification obligations. The Seller will not be released from any of its obligations under any of the Leases by the Lessees. The consent of the Lessee to the sale of the Leased Property will be obtained in each case.

11. Each of XXXXXXXXXX and the Purchasers deal at arm's length with each of XXXXXXXXXX.

PURPOSE OF THE PROPOSED TRANSACTIONS

12. The purpose of the Proposed Transactions is to effect the sale of the Leased Property from the Seller to the Purchasers.

13. The main reasons XXXXXXXXXX wishes to complete the Proposed Transactions through subsidiary corporations are as follows:

(i) Purchase of the Leased Property through separate subsidiaries enables XXXXXXXXXX to isolate the risks and benefits associated with the purchase of particular assets and Leases in separate companies.

(ii) XXXXXXXXXX wishes to isolate any financing obligations relating to the Proposed Transactions in separate companies to avoid complicating its current credit arrangements and to avoid negative pledge restrictions in its existing loan agreements which might prevent XXXXXXXXXX (but not its subsidiaries) from granting security over the Leased Property to third party lenders.

(iii) Third party lenders may require that the Leased Property be held in separate corporations that do not carry on other businesses in order to avoid the risk that such other businesses may adversely affect the value of the Leased Property and the Leases (ie. bankruptcy remoting).

(iv) XXXXXXXXXX wishes to have the ability to choose the vehicle by which it may dispose of the Leased Property in the future - i.e. by way of a direct sale of the Leased Property or by way of a sale of the shares of the subsidiary owning particular Leased Property.

RULING

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our ruling is as follows:

We confirm that the purchase of the Leased Property and the assignment of the Leases pertaining to such property as described above will not, in and of itself, cause the Leased Property to become "specified leasing property" within the meaning of subsection 1100(1.11) of the Income Tax Regulations.

This ruling is given subject to the general limitations and qualifications set out in Information Circular IC 70-6R3 dated December 30, 1996, and are binding on Revenue Canada, Taxation provided that the proposed transactions herein are completed by XXXXXXXXXX.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

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