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 paragraph 85(1)(b) will apply to a transfer of a property with liabilities in excess of cost amount where the excess is assumed by the transferee in consideration for the transfer by the transferor of cash in the amount of the excess.
Position: no.
Reasons: The cash amount transferred by the transferor to the transferee is consideration for the transferee to assume the excess liabilities of the transferor.
XXXXXXXXXX
XXXXXXXXXX 1999-001074
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 2000
Dear Sirs:
Re: XXXXXXXXXX
XXXXXXXXXX
Advance Income Tax Ruling
This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-noted taxpayer. In your letters of XXXXXXXXXX, you provided additional information concerning the facts and proposed transactions described in your original letter. We also acknowledge the information provided during our various telephone conversations (XXXXXXXXXX).
To the best of your knowledge, and that of the taxpayers involved, none of the issues contained herein:
(i) is in an earlier return of the taxpayer or a related person;
(ii) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer or a related person;
(iii) is under objection by the taxpayer or a related person;
(iv) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; or
(v) is the subject of a ruling previously issued by the Directorate.
DEFINITIONS
In this letter, the following terms have the meanings specified:
(a) Unless otherwise indicated, all references to statute are to the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.), c.1, as amended ( the "Act");
(b) "adjusted cost base" ("ACB") has the meaning assigned in section 54 and subsection 248(1);
(c) "agreed amount" has the meaning assigned by subsection 85(1);
(d) "arm's length" has the meaning assigned by section 251;
(e) "Canadian-controlled private corporation" ("CCPC") has the meaning assigned by subsection 125(7);
(f) "capital property" has the meaning assigned by the definition in section 54;
(g) "cost amount" has the meaning assigned by subsection 248(1);
(h) "depreciable property" has the meaning assigned by subsection 13(21);
(i) "FMV" means fair market value;
(j) "subsidiary wholly-owned corporation" has the meaning assigned by subsection 248(1);
(k) "taxable Canadian corporation"("TCC") has the meaning assigned by subsection 89(1); and
(l) "undepreciated capital cost" has the meaning assigned by subsection 13(21).
Facts
1. XXXXXXXXXX ("Mr. A") is an individual resident in XXXXXXXXXX. Mr. A owns a XXXXXXXXXX% undivided interest in Land and Building known as XXXXXXXXXX (the "Real Property"). The Real Property was acquired in XXXXXXXXXX and XXXXXXXXXX at construction. The Real Property is a XXXXXXXXXX rental property. Mr. A holds his XXXXXXXXXX% undivided interest in the Real Property as capital property.
The FMV of Mr. A's undivided interest in the Real Property is approximately $XXXXXXXXXX. The cost amount to Mr. A of the Real Property is approximately $XXXXXXXXXX for the Land and $XXXXXXXXXX for the Building, or an aggregate of $XXXXXXXXXX.
The Real Property is subject to a first charge mortgage ("Mortgage"). Mr. A's share of the Mortgage is approximately $XXXXXXXXXX. Interest on the Mortgage is currently deductible to Mr. A under paragraph 20(1)(c) of the Act.
The Real Property has operating liabilities which currently exceed its cash and receivables (the "Working Deficit"). Mr. A's share of the Working Deficit is approximately $XXXXXXXXXX. The aggregate of Mr. A's liabilities in respect of the Mortgage and the Working Deficit (the "Property Debt") is estimated to be $XXXXXXXXXX which exceeds the cost amount to Mr. A of his interest in the Real Property (the "Excess Amount") by approximately $XXXXXXXXXX.
Since XXXXXXXXXX, Mr. A's net income for a particular year from renting or leasing the Real Property, computed without regard to paragraph 20(1)(a) of the Act, has exceeded the maximum amount that was allowable under subsection 1100(1) of the Income Tax Regulations to Mr. A for that year in respect of the Real Property.
2. Mr. A, his father and his brother each owns one third of the shares of XXXXXXXXXX. ("Aco"). Aco was incorporated in XXXXXXXXXX pursuant to the XXXXXXXXXX Companies Act and is a TCC and a CCPC. Aco owns all of the issued and outstanding shares of XXXXXXXXXX ("Holdco").
Holdco was incorporated on XXXXXXXXXX under the XXXXXXXXXX Companies Act and subsequently continued under the Canada Business Corporations Act on XXXXXXXXXX. Holdco is a TCC and a CCPC. The authorized share capital of Holdco consists of XXXXXXXXXX common voting shares which are owned by Aco. Holdco's significant assets include property held for sale or development, income-producing properties and investments in related companies.
Holdco was originally incorporated to provide residential property in the XXXXXXXXXX and through the XXXXXXXXXX diversified its operations to include house building and investment in related industries. With the introduction of the MURB program in the late seventies, Holdco expanded its operations to include apartment construction, sales promotion and property management. With the introduction of the Immigrant Investor Program, Holdco expanded its operations to include commercial real estate development and fund management. Many of the MURB projects have been managed by a sister corporation, XXXXXXXXXX, since their construction. The investors in these programs are now reaching retirement age and are seeking a means of liquidity surrounding their investment. Over the years Holdco has sought to maintain the viability of the projects resulting in the family of Mr. A picking up any defaulting units not subscribed for by other owners.
Proposed transactions
3. Holdco will incorporate two subsidiary wholly-owned corporations: XXXXXXXXXX ("Subco") and Newco, pursuant to the Canada Business Corporations Act. Subco and Newco will each be a TCC and a CCPC. Subco's ordinary business will be the lending of money.
4. Holdco, Newco and Mr. A will form the XXXXXXXXXX (the "Partnership") pursuant to the laws of the Province of XXXXXXXXXX. Newco will be the general partner and Holdco and Mr. A will be the limited partners of the Partnership. Newco will acquire a XXXXXXXXXX% general partnership interest in the Partnership and each of Holdco and Mr. A will acquire XXXXXXXXXX limited partnership units of the Partnership for a cash consideration of $XXXXXXXXXX. The Partnership's business will be to own and operate real estate rental properties. The Partnership will be a Canadian partnership as defined in subsection 102(1) of the Act.
5. Mr. A will borrow from Subco an amount equal to the Excess Amount (the "Loan"). The Loan will bear an interest rate of XXXXXXXXXX% per annum, and will be payable in XXXXXXXXXX years. Mr. A will use the Loan proceeds to fund the transaction described in paragraph 6 below.
6. Pursuant to an agreement between the Partnership and Mr. A, Mr. A will transfer to the Partnership:
(a) his XXXXXXXXXX% undivided interest in the Real Property at FMV; and
(b) a cash amount equal to the Excess Amount (the "Cash Amount").
As consideration for the transfer of property described herein, the Partnership will:
(c) assume the Property Debt; and
(d) issue to Mr. A limited partnership units of its capital having an aggregate FMV equal to the FMV of the property transferred to the Partnership as described herein less the amount of the liabilities of Mr. A assumed by the Partnership as described in paragraph (c) above.
Due to principal repayments and changes to the Working Deficit that may arise between the date of your ruling request and the date of the transfer, the principal amount of the Property Debt to be assumed by the Partnership, the Cash Amount to be transferred by Mr. A to the Partnership and the number of limited partnership units of the Partnership to be issued by the Partnership to Mr. A will be adjusted on the date of the transfer.
The agreement between Mr. A and the Partnership will specify that the portion of Mr. A's Property Debt having a principal amount equal to the Cash Amount will be assumed by the Partnership as consideration for the transfer by Mr. A of the Cash Amount to the Partnership.
The Cash Amount to be transferred by Mr. A to the Partnership as described in this paragraph will be used by the Partnership for the purpose of gaining or producing income from its business. Such Cash Amount or property substituted for such Cash Amount will not be withdrawn by Mr. A or any partner of the Partnership nor will it be loaned to Mr. A or to any person or partnership which does not deal at arm's length with Mr. A.
7. Mr. A and each of the other members of the Partnership will jointly elect pursuant to subsection 97(2), in prescribed form and within the time referred to in subsection 96(4), in respect of the disposition of Mr. A's XXXXXXXXXX% undivided interest in the Real Property. Specifically, the agreed amount in each joint election will be equal to the least of :
(a) the amounts specified in subparagraphs 85(1)(d)(i), (ii) or (iii) in the case of eligible capital property,
(b) the amounts specified in subparagraphs 85(1)(e)(i), (ii) or (iii) in the case of depreciable property of a prescribed class, and
(c) the amounts specified in subparagraphs 85(1)(c.1)(i) or (ii), in the case of property described in paragraph 85(1)(c.1).
In each case, the agreed amount will not exceed the fair market value of the respective property, nor will it be less than the amount permitted under paragraph 85(1)(b).
Pursuant to paragraph 97(2)(b) of the Act, in computing the ACB to Mr. A of his interest in the Partnership immediately after the disposition of his interest in the Real Property,
(d) there shall be added the amount, if any, by which Mr. A's proceeds of disposition of the property exceed the FMV, at the time of the disposition, of the consideration (other than an interest in the Partnership) received by Mr. A for the property, and
(e) there shall be deducted the amount, if any, by which the FMV, at the time of the disposition, of the consideration (other than an interest in the Partnership) received by Mr. A for the property so disposed of by Mr. A exceeds the FMV of the property at the time of the disposition.
8. Holdco will undergo a public offering and will use the proceeds therefrom to expand its business. Additional investors both, arm's length and related, will be approached, pursuant to an Offering Memorandum or Prospectus, to invest in the Partnership on similar terms to Mr. A. Subco will provide financing to various investors in the Partnership on similar terms to Mr. A.
Purpose of the proposed transactions
9. The purpose of the proposed transactions is to allow Mr. A to exchange his undivided interest in the Real Property for a partnership interest in the Partnership permitting him to diversify his investment in real estate and to improve the liquidity of his investment.
Rulings
Provided that the preceding statements constitute a complete and accurate disclosure of all 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 rulings are as follows:
A. Subject to the application of subsection 13(21.2) to the transfer of the Building, the provisions of subsection 97(2) will apply with respect to the transfer by Mr. A of his interest in the Real Property to the Partnership, as described in paragraphs 6 and 7, such that the agreed amount in respect of each such property will be deemed to be the proceeds of disposition thereof to Mr. A and the cost thereof to the Partnership.
B. Provided that the Partnership continues to use the Real Property, or any property substituted therefor, for the purpose of gaining or producing income from its business and has a legal obligation to pay interest on any particular liability included in the Property Debt which was assumed by it (other than any particular liability in respect of which Mr. A would not have been entitled to deduct interest pursuant to paragraph 20(1)(c)), an amount paid in the year or payable in respect of the year (depending upon the method regularly followed by the Partnership in computing its income) as interest, or a reasonable amount in respect thereof, whichever is the lesser, on any such Property Debt so assumed will be deductible by the Partnership, pursuant to paragraph 20(1)(c), in computing its income for each such year.
C. Provided that the Cash Amount transferred by Mr. A to the Partnership, or any property substituted therefor, is used by the Partnership for the purposes of gaining or producing income from its business, an amount paid in the year or payable in respect of the year (depending upon the method regularly followed by Mr. A in computing his income) as interest, or a reasonable amount in respect thereof, whichever is the lesser, on the Loan will be deductible, pursuant to paragraph 20(1)(c), in computing the income of Mr. A for each such year.
These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R3 issued on December 30, 1996 and are binding provided that the proposed transactions are completed by XXXXXXXXXX.
The above rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided herein.
1. It is our view that the Loan borrowed by Mr. A from Subco to fund the Cash Amount to the Partnership as described in paragraphs 5 and 6 above, will be subject to the application of paragraph 96(2.2)(c) of the Act.
2. Nothing in this ruling should be construed as implying that the Canada Customs and Revenue Agency has agreed to or reviewed:
(a) the determination of the FMV or adjusted cost base of any particular asset or share or the PUC of any shares referred to herein; or
(b) any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above. For greater certainty, we are not commenting on the application of subsection 15(2) to the Loan described in paragraph 5 above.
Yours truly,
for Director
Reorganizations and International Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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