4 February 2000 External T.I. 2000-0005705 - bump

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 Pco can avail itself of the bump under paragraph 88(1)(d) in respect of certain farm land previously owned by Vco?

2. Whether our response would differ if Pco does not deal at arm's length with Vco?

3, Whether the transactions would be subject to GAAR?

Position:

1. Provided that the farm land represents capital property to Vco at the time that Pco acquires control of Vco, Pco should be able to designate a bump.

2. Under 88(1)(d.2) Pco is deemed to have acquired control of Vco at the time that Vendor acquired control of Vco. Consequently, the amount of the bump will be limited.

The farm land will not be ineligible property under 88(1)(c)(vi) since no person, other than a specified person, will acquire the farm land or any substituted property.

3. Provided general disclaimer.

Reasons:

1. Interpretation of the law
2. Interpretation of the law
3. Cannot comment on GAAR in general situation

XXXXXXXXXX 2000-000570
F. Francis
Attention: XXXXXXXXXX

February 4, 2000

Dear Sirs:

Re: Land Purchase Transaction

This is in reply to your letter of November 13, 1999, wherein you requested our comments with respect to a particular series of transactions involving the purchase of farm land which is owned by a corporation.

All references are to the Income Tax Act (the "Act").

In particular you request our comments in respect of the following situation:

1. An individual farmer ("Purchaser") incorporates a corporation ("Pco") for the purpose of acquiring certain farm land owned by Vco, a corporation with which he deals at arm's length. Purchaser provides a loan to Pco (the "Loan") in an amount equal to the fair market value of the farm land.

2. Pco acquires the shares of Vco from its shareholder, Vendor, at fair market value. The shares of Vco qualify as shares of the capital stock of a family farm corporation or as qualified small business corporation shares for purposes of the capital gains exemption under subsection 110.6(1).

3. Vco either amalgamates with Pco pursuant to subsection 87(1) or is wound-up into Pco pursuant to subsection 88(1). Pco designates an amount under paragraph 88(1)(d).

4. Purchaser acquires the land from Pco at fair market value. As consideration, the Loan is set-off and cancelled.

As a consequence, Vendor is entitled to a capital gains exemption in respect of the disposition of the shares of Vco and Purchaser owns land with an adjusted cost base equal to the amount paid for the shares of Vco.

You request our views as to whether Pco is entitled to a "bump" under paragraph 88(1)(d) in respect of the farm land. You further enquire as to whether our response would differ in a situation where Purchaser does not deal at arm's length with Vendor. Finally, you enquire as to whether the above series of transactions would be subject to subsection 245(2).

OUR COMMENTS

We note that, pursuant to subsection 87(11), a new corporation formed upon an amalgamation, which is subject to subsection 87(1), of a parent corporation and one or more of its subsidiary wholly-owned corporations is entitled to the same "bump" under paragraph 88(1)(d) as if the subsidiary had been wound-up into the parent corporation and subsection 88(1) had applied to the winding-up.

Provided that Pco deals at arm's length with Vco and provided that the farm land represents capital property to Vco at the time that Pco acquires control of Vco and is owned by Vco without interruption until such time as it is distributed to Pco, it is our view that the Pco would generally be entitled to designate an amount under paragraph 88(1)(d) in respect of the farm land.

However, if Pco does not deal at arm's length with Vco, the rules in paragraph 88(1)(d.2) will deem Pco to have acquired control of Vco at the time when Vendor acquired control of Vco. Consequently, the amount of the "bump" would be limited to the amount by which the fair market value of the farm land determined at the time when Vendor acquired control of Vco exceeds the cost amount to Vco immediately before the winding-up.

Finally we note that the determination as to whether a particular series of transactions would be subject to subsection 245(2) can only be made on a case-by-case basis.

We trust the above comments are of assistance to you. However, as noted in Information Circular 70-6R3 issued on December 30, 1996, the above comments are not binding on the Canada Customs and Revenue Agency.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings Directorate
Policy and Legislation Branch