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 an "in-house" transfer of depreciable property designed to utilize capital losses is subject to the GAAR?
2. Whether the properties qualify as depreciable property to Opco?
Position: 1. No. Similar to ruling given - 9419413.
2. Yes. Opco will hold property for a month and will earn income therefrom.
Reasons: 1. The previous ruling was presented to the GAAR Committee and it was concluded that GAAR will not apply.
2. Consistent with decision in Hickman Motors.
XXXXXXXXXX
XXXXXXXXXX 2000-001454
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 2000
Dear Sirs:
Re: XXXXXXXXXX (" Privateco" )
This is in reply to your letters of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-noted taxpayer.
You have been advised by Privateco that none of the issues involved in this ruling request is, to the best of its knowledge, being considered by a Tax Services Office or Taxation Centre in connection with any tax return already filed, before any tax court, the subject of any notice of objection, or under appeal.
DEFINITIONS
In this letter, the following terms have the meanings specified:
(a.1) " Act" means the Income Tax Act, R.S.C. 1985, c.1 (5th Supp.), as amended; all statutory references herein are to provisions of the Act unless otherwise specified;
(a) " active business" has the meaning assigned by subsection 248(1) ;
(b) " adjusted cost base" (" ACB" ) has the meaning assigned by section 54 ;
(c) " capital gain" has the meaning assigned by subsection 39(1) ;
(d) " capital property" has the meaning assigned by section 54 ;
(e) " CCPC" means " Canadian-controlled private corporation" , and has the meaning assigned in subsections 125(7) and 248(1);
(f) " cost amount" has the meaning assigned by subsection 248(1) ;
(g) " depreciable property" has the meaning assigned by subsection 248(1) ;
(h) " eligible property" has the meaning assigned by subsection 85(1.1);
(i) " paid-up capital" has the meaning assigned by subsection 89(1);
(j) " private corporation" has the meaning assigned by subsection 89(1) ;
(k) " proceeds of disposition" (" POD" ) has the meaning assigned by section 54 ;
(k.1) " Regulations" means the Income Tax Regulations;
(1) " related person" has the meaning assigned by subsection 251(2) ;
(m) " taxable Canadian corporation" has the meaning assigned by subsection 89(1); and
(n) " UCC" means " undepreciated capital cost" as defined in subsection 13(21).
Our understanding of the facts, purposes of proposed transactions and proposed transactions is as follows:
STATEMENT OF FACTS
1. Privateco is governed by the Canada Business Corporations Act (the " CBCA" ) and is a taxable Canadian corporation and a CCPC that operates a XXXXXXXXXX business mainly in XXXXXXXXXX, although it has permanent establishments in XXXXXXXXXX. Privateco has an XXXXXXXXXX year-end for income tax purposes.
2. The current shareholders of Privateco are:
Shareholder Number of Shares
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
The XXXXXXXXXX shares are common shares. The XXXXXXXXXX shares are preference shares which are redeemable at $XXXXXXXXXX per share.
3. XXXXXXXXXX owns all the shares of XXXXXXXXXX is a resident of Canada.
4. XXXXXXXXXX controls XXXXXXXXXX is a resident of Canada XXXXXXXXXX.
5. XXXXXXXXXX.
6. XXXXXXXXXX is not a resident of Canada.
7. During the XXXXXXXXXX taxation years, Privateco acquired shares (totalling approximately XXXXXXXXXX %) of XXXXXXXXXX. The XXXXXXXXXX shares were publicly traded on the XXXXXXXXXX Stock Exchange. Privateco's ACB of the XXXXXXXXXX shares was $XXXXXXXXXX as at XXXXXXXXXX.
8. The XXXXXXXXXX audited financial statements of Privateco were prepared on the basis that there was a loss on the write-down of the XXXXXXXXXX shares. This loss was added back in computing Privateco's taxable income. In its XXXXXXXXXX taxation year, Privateco did not elect under subsection 50(1) and did not claim a capital loss for income tax purposes on the XXXXXXXXXX shares.
9. XXXXXXXXXX made an assignment in bankruptcy on XXXXXXXXXX and its shares are no longer traded on the XXXXXXXXXX Stock Exchange.
10. Privateco acquired significant depreciable property (of different prescribed classes) in its XXXXXXXXXX taxation year in a bulk purchase transaction.
11. Privateco owns all the shares of XXXXXXXXXX (" Opco" ), a taxable Canadian corporation, which owns and leases real property used in Privateco's business. Opco is governed by the CBCA.
PROPOSED TRANSACTIONS
12. Privateco will sell certain depreciable properties of prescribed classes ( the " Properties" ) to Opco in exchange for common shares of Opco having a paid-up capital equal to the agreed amount described in paragraph 13 below.
13. Privateco and Opco will jointly elect in prescribed form within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of the Properties. The agreed amount for each eligible property will not be less than the least of amounts described in subparagraphs 85(1)(e)(i), (ii) and (iii). The fair market value of each eligible property transferred will exceed the cost amount. The agreed amounts will exceed the capital costs of those assets and will result in capital gains for income tax purposes.
The total of the agreed amounts in respect of the transfer of the Properties will not exceed the aggregate of:
(a) the total capital cost to Privateco of such property, and
(b) the amount of Privateco's capital loss of the year from the deemed disposition mentioned in paragraph 16 below.
The legal title of the Properties and all the incidents of ownership such as possession, use and risk will pass to Opco after signing the purchase and sale agreement by Privateco and Opco. Privateco and Opco will carry out all necessary steps to effect the transfer of legal and beneficial ownership of the Properties including the following:
(a) the directors of Privateco and Opco will each authorize the sale and purchase of the Properties;
(b) a purchase and sale agreement will be executed between Privateco and Opco providing for:
(i) the purchase price to be paid by the issuance of common shares by Opco;
and
(ii) the parties' agreeing to file the required tax elections under the Act;
and
(c) Privateco will, if needed, obtain all creditors' authorization for the transfer of the Properties.
14. Opco proposes to lease the Properties to Privateco for a period of approximately XXXXXXXXXX and to earn income at a fair market value rate.
15. Privateco will cause Opco to be wound up. A resolution of the shareholder, Privateco, authorizing and requiring that Opco be wound up will be passed on or about XXXXXXXXXX. In addition, a general conveyance of assets and assumption of liabilities will be executed between Privateco and Opco on or about XXXXXXXXXX.
16. At its year-end, Privateco will elect under subsection 50(1) in respect of the shares of XXXXXXXXXX.
PURPOSES OF PROPOSED TRANSACTIONS
Privateco wishes to:
(a) use the unrealized capital loss on the XXXXXXXXXX shares to increase the capital cost of some of its depreciable properties;
and
(b) simplify the existing corporate structure by eliminating Opco.
RULINGS
Provided that the above statements are accurate and constitute complete disclosure of all of the relevant facts, purposes of the proposed transactions and proposed transactions, we confirm the following:
A. Provided that the transfer of the Properties, described in paragraphs 12 and 13 above, from Privateco to Opco, is legally effective, it will result in a disposition of the Properties by Privateco for purposes of the Act .
B. Provided that the requisite election is made by Privateco and Opco in the prescribed form and within the prescribed time, the provisions of subsection 85(1) will apply to the transfer of the Properties, described in paragraphs 12 and 13, from Privateco to Opco such that:
(i) the agreed amounts in respect of such transfer will be deemed to be the proceeds of disposition of the Properties to Privateco and the cost of the Properties to Opco; and
(ii) for greater certainty, the provisions of paragraph 85(1)(e.2) will not apply to the transfer.
C. The provisions of subsection 1102(14) of the Regulations will apply to the transfer of the Properties, described in paragraphs 12 and 13, to deem each of the Properties transferred to Opco to be property of the same prescribed class as that of Privateco immediately before the transfer.
D. On the winding-up of Opco into Privateco described in paragraph 15 above:
(i) the provisions of subsection 88(1) will apply, such that:
(a) each property of Opco distributed to Privateco on the winding-up will be deemed by paragraph 88(1)(a) to have been disposed of by Opco for proceeds of disposition determined under that paragraph;
(b) the shares in the capital stock of Opco held by Privateco immediately before the winding-up will be deemed by paragraph 88(1)(b) to have been disposed of by Privateco for proceeds determined under that paragraph;
and
(c) each property of Opco distributed to Privateco on the winding-up will be deemed by paragraph 88(1)(c) to have been acquired by Privateco for an amount equal to the amount deemed by paragraph 88(1)(a) to be Opco's proceeds of disposition of the property and no more;
(ii) the provisions of subsection 1102(14) of the Regulations will apply to deem each property of the Properties acquired by Privateco to be property of the same prescribed class as that of Opco immediately before the wind-up;
and
(iii) for each property of the Properties acquired by Privateco in respect of which the conditions described in paragraph 1100(2.2)(g) of the Regulations are met, no amount will be included under paragraph 1100(2)(a) of the Regulations for such property.
D. The provisions of subsection 1102(20) of the Regulations will not apply to the proposed transactions in and of themselves.
E. Subsection 245(2) will not be applied as a result of the proposed transactions, in and of themselves, to redetermine the tax consequences as described in the rulings given.
These rulings are given subject to the 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 that the proposed transactions are completed before 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 provisions of paragraph 13(7)(e) will apply, where the capital cost of a property transferred to Opco, determined without reference to that paragraph, exceeds the capital cost of such property to Privateco before its disposition, such that the capital cost to Opco of such property will be reduced.
2. Nothing in this ruling should be construed as implying that the Canada Customs and Revenue Agency has:
(a) agreed to the adjusted cost base, paid-up capital or fair market value of any shares described herein;
or
(b) reviewed, accepted or otherwise agreed to any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given.
OPINION
Provided that the proposed new definition of " disposition" in subsection 248(1) is enacted substantially as proposed, we confirm that the ruling (A) given above will continue to be binding.
The foregoing opinion is not a ruling, and in accordance with the practice referred to in Information Circular 70-6R3, is 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
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