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:
1. Whether 98(5) applies on partnership windup into corporation.
2. Whether sale of partnership interests eligible for 110.6(2) deduction.
3. Whether 245(2) applies.
Position:
1. Yes.
2. Yes.
3. No.
Reasons:
1. Corporation will be a member of partnership immediately before dissolution.
2. Provided they qualify as interests in a family farm partnership.
XXXXXXXXXX
XXXXXXXXXX 1999-001433
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 2000
Dear Sirs:
Re: Advance Income Tax Ruling
XXXXXXXXXX
We are writing in connection with your letter dated XXXXXXXXXX requesting an advance income tax ruling on behalf of XXXXXXXXXX ("H") and XXXXXXXXXX ("W"). All references to statute are to the Income Tax Act (the "Act").
You advise that to the best of your knowledge, none of the issues contained herein:
(a) is in an earlier return of H or W or a related person;
(b) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of H or W or a related person;
(c) is under objection by the H or W or a related person;
(d) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; or
(e) is the subject of a ruling previously issued by the Income Tax Rulings Directorate of the Canada Customs and Revenue Agency.
Our understanding of the facts, proposed transactions and their purposes is as follows.
FACTS
1. H and W are individuals, are married to each other, are residents of Canada and reside at the following address: XXXXXXXXXX. The social insurance number of H is XXXXXXXXXX and that of W is XXXXXXXXXX.
2. H and W have been carrying on an active farming business in XXXXXXXXXX as a partnership for XXXXXXXXXX years (the "Partnership"). H and W's interests in the Partnership are XXXXXXXXXX% and XXXXXXXXXX% respectively.
3. The Partnership owns assets which are all used in its farming business. These assets include grain inventory, the value of which was approximately $XXXXXXXXXX at XXXXXXXXXX and the cost of which is XXXXXXXXXX (the "Inventory"), and depreciable property (included in classes 8 and 10 of Schedule II of the Income Tax Regulations) consisting of farm equipment, the fair market value of which is approximately $XXXXXXXXXX and the undepreciated capital cost of which at XXXXXXXXXX was approximately $XXXXXXXXXX (the "Equipment").
4. The Partnership assets also include real estate (the "Farmland"), which will be transferred to H and W prior to implementation of the proposed transactions set out below.
5. The adjusted cost base, as that expression is defined in section 54 of the Act, of the interest of each of H and W in the Partnership as of XXXXXXXXXX is $XXXXXXXXXX and $XXXXXXXXXX respectively.
6. The fair market value of the interest of each of H and W in the Partnership is $XXXXXXXXXX and $XXXXXXXXXX respectively.
7. XXXXXXXXXX (the "Company") was incorporated under the laws of XXXXXXXXXX. It is a "taxable Canadian corporation" as that term is defined in subsection 89(1) of the Act and a "Canadian-controlled private corporation" as that term is defined in subsection 248(1) of the Act. Its income tax account number is XXXXXXXXXX.
8. The Company is inactive at present but upon implementation of the proposed transactions described below, it will be carrying on business, the major activity of which will be farming.
9. All of the shares of the Company are owned XXXXXXXXXX by H and W.
PROPOSED TRANSACTIONS
10. H proposes to sell his interest in the Partnership, at a price equal to its fair market value, to the Company and in consideration therefor, the Company will issue to H a promissory note equal to such fair market value. H expects to realize a capital gain as a result of this disposition of his interest in the Partnership.
11. On the day following the transaction described in 10 above, W proposes to sell her interest in the Partnership, at a price equal to its fair market value, to the Company and in consideration therefor, the Company will issue to W a promissory note equal to such fair market value. W expects to realize a capital gain as a result of this disposition of her interest in the Partnership.
12. Neither H nor W will elect under section 85 of the Act in respect of the transactions described in 10 and 11 above.
13. As a result of 11 above, the Partnership will cease to exist and immediately thereafter, the Company will be the sole owner of the Partnership property, including the Inventory and the Equipment, and will continue to carry on alone the same business as that carried on by the Partnership immediately prior to its dissolution, using the Inventory and Equipment in the course of that business.
14. It is intended that the Company will eventually sell the Inventory and the Equipment and will use the proceeds to repay the promissory notes referred to in 10 and 11 above. This may take approximately XXXXXXXXXX years. Following this, the Company will cease carrying on its farm business activity.
15. Following the transfers of their interests in the Partnership to the Company as described above, H and W will not actively farm again. While H and W will own the Farmland, their intent is to rent it to other farmers for cash consideration or to sell it.
16. H and W intend to remain residents of Canada for the foreseeable future.
PURPOSE OF THE PROPOSED TRANSACTIONS
H and W intend to retire from their farming business and to do so in such a manner as to: benefit from the enhanced capital gains exemption; wind up the Partnership on a tax-deferred basis; benefit from the small business deduction in respect of the income from the eventual sale of the Inventory and Equipment; and provide for the repayment of the promissory notes with the after-tax proceeds from the sale of the Inventory and Equipment.
RULINGS GIVEN
Provided all relevant facts, proposed transactions and their purposes have been fully disclosed and, as summarized above, are accurate and further provided that the Partnership is a partnership at law, we confirm the following:
A. Subsection 98(5) of the Act will apply with respect to the cessation of the Partnership as described in 13 above.
B. Provided the interest of each of H and W in the Partnership is an "interest in a family farm partnership", as that expression is defined in subsection 110.6(1) of the Act, at the time at which such interests are disposed of as described in 10 and 11 above, each of H and W will be entitled to deduct in computing taxable income such amount as is permitted pursuant to subsection 110.6(2) of the Act.
C. As a result of the proposed transactions, in and by themselves, subsection 245(2) of the Act will not be applied to redetermine the tax consequences confirmed in the rulings given above.
These rulings are given subject to the general limitations and qualifications set forth in Information Circular 70-6R3 issued on December 30, 1996, and are binding on the Canada Customs and Revenue Agency provided the proposed transactions are entered into on or before XXXXXXXXXX. These rulings are based on the Act in its present form and do not take into account the effect of any proposed amendments thereto. Except as expressly stated, our rulings do not imply acceptance, approval or confirmation of any income tax implications of the facts or proposed transactions. In particular, nothing in this letter should be interpreted as confirming, either expressly or implicitly: the fair market values referred to above; that a farming business has been carried on at any time; or that the Company will be entitled to the small business deduction provided in section 125 of the Act.
Yours truly,
XXXXXXXXXX
for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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