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. capital or income gain on sale by partners after 98(3)?
2. can 98(3) apply where one partner's capital interest in the partnership is 0%?
3. does admin position re 53(1)(e)(i) apply?
4. does GAAR apply?
Position:
1.capital gain
2. yes, if all partners elect
3. yes
4. no
Reasons: see Issue Sheet
1. capital property of partnership; immediate dispositions by partners of their interests in partnership property will not transform nature of gain
2. 98(3) applies if all partners elect; no prohibition re 0% capital interest
3. Avoid double tax
4. transactions arranged for other than tax purposes; no misuse / abuse
XXXXXXXXXX 2000- 002842
Attention: XXXXXXXXXX
XXXXXXXXXX, 2000
Dear Sirs:
Re: XXXXXXXXXX
Advance Income Tax Rulings
We are writing in response to your letter of XXXXXXXXXX wherein you requested advance income tax rulings on behalf of the above taxpayer.
To the best of your knowledge, and that of the taxpayer involved, none of the issues contained herein is:
(i) dealt with in an earlier return of the taxpayer or a related person;
(ii) 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) under objection by the taxpayer or a related person;
(iv) subject to a ruling previously issued by the Income Tax Rulings Directorate; or
(v) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired.
In this letter, the following terms have the meanings specified:
(a) "Act" means the Income Tax Act, R.S.C 1985 (5th Supp.) c.1, as amended to the date hereof, and, unless otherwise stated, every reference herein to a Part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Act;
(b) "ACB" means "adjusted cost base" within the meaning assigned by section 54 of the Act;
(c) "capital cost" has the meaning assigned by section 54 of the Act;
(d) "Canadian partnership" has the meaning assigned by subsection 102(1) of the Act;
(e) "Co. A" means XXXXXXXXXX a taxable Canadian corporation;
(f) "Co. B" means XXXXXXXXXX, a taxable Canadian corporation;
(g) "Co. C" means XXXXXXXXXX, a taxable Canadian corporation;
(h) "Co. D" means XXXXXXXXXX, a taxable Canadian corporation and a wholly-owned subsidiary corporation of Co. A;
(i) "eligible property" has the meaning assigned by subsection 85(1.1) of the Act;
(j) "General Partner Co." means XXXXXXXXXX, the general partner of the Partnership;
(k) "lands and buildings" means real property comprised of lands with two contiguous high-rise office complexes known as the "XXXXXXXXXX" located in the City of XXXXXXXXXX. The legal description of the property is XXXXXXXXXX;
(l) "Partnership" means the XXXXXXXXXX;
(m) "Mr. A" means XXXXXXXXXX;
(n) "Mr. B" means XXXXXXXXXX;
(o) "Mr. C" means XXXXXXXXXX;
(p) "Mr. D" means XXXXXXXXXX;
(q) "Limited Partners" means the limited partners of the Partnership, namely, Co. A, Co. B., Co. C, Mr. A., Mr. B, Mr. C, and Mr. D;
(r) "Partners" means General Partner Co. and the Limited Partners;
(s) "Partnership property" means cash, miscellaneous prepaid amounts, eligible capital property, and the lands and buildings;
(t) "proceeds of disposition" has the meaning assigned by section 54 of the Act;
(u) "public corporation" has the meaning assigned by subsection 89(1) of the Act;
(v) "related" has the meaning assigned by subsection 251(2) of the Act;
(w) "taxable Canadian corporation" has the meaning assigned by subsection 89(1) of the Act;
(x) "undepreciated capital cost" has the meaning assigned by subsection 13(21) of the Act; and
(y) "wholly-owned corporation" has the meaning assigned by subsection 248(1) of the Act.
FACTS
1. The Partnership is a limited partnership formed under the laws of the Province of XXXXXXXXXX and is a Canadian partnership.
2. The Partnership was formed as at XXXXXXXXXX to acquire, own, operate, sell and otherwise carry on the business and deal with the lands and buildings.
3. The Partners' income interests in the Partnership have been held in the following proportions from inception to date:
General Partner Co. 0.01%
Limited Partners 99.99%
4. Each Limited Partner's share of the income of the Limited Partners is represented as follows:
Co. A - XXXXXXXXXX
Mr. A - XXXXXXXXXX
Mr. B - XXXXXXXXXX
Co. B - XXXXXXXXXX
Co. C - XXXXXXXXXX
Mr. C - XXXXXXXXXX
Mr. D - XXXXXXXXXX
5. The General Partner has 0% undivided interest in each property of the Partnership on its cessation. The undivided interests of each Limited Partner in each property of the Partnership on its dissolution are as listed in parentheses in paragraph 4 above, substituting "100" for "99.99".
6. The Partnership's fiscal year end is XXXXXXXXXX.
7. The lands and buildings are capital property of the Partnership.
8. The adjusted cost base and capital cost to the Partnership of the lands and buildings are, respectively, $XXXXXXXXXX and $XXXXXXXXXX. The current undepreciated capital cost of the buildings is $XXXXXXXXXX. The cumulative eligible capital balance is $XXXXXXXXXX.
9. The Partners have determined, based on an appraisal obtained, the current value of the lands and buildings to be $XXXXXXXXXX.
10. The Partnership has a mortgage outstanding in the amount of approximately $XXXXXXXXXX on the lands and buildings payable to the XXXXXXXXXX and it has miscellaneous trade payables and accrued liabilities associated with the operations of the buildings, such as tenant deposits, and an advance from the General Partner of $XXXXXXXXXX, which has been outstanding since the inception of the Partnership. In total, the liabilities outstanding are slightly less than $XXXXXXXXXX. All liabilities relate to the ordinary business operations of the Partnership.
11. Space within the buildings has been rented to a number of tenants, including Co. A and its subsidiaries, since acquisition by the Partnership.
12. General Partner Co., Co. A, Co. B, and Co. C. are all taxable Canadian corporations.
13. Co. A. is a public corporation whose shares trades on the XXXXXXXXXX Stock Exchange. Mr. A is the current XXXXXXXXXX of Co. A. Mr. B is the XXXXXXXXXX of Co. A. Mr. C and Mr. D are employees of Co. A.
14. Mr. A, Mr. B, Mr. C and Mr. D are all individuals resident in Canada for purposes of the Act.
15. All Partners file their tax returns at the XXXXXXXXXX Tax Services Office.
16. None of the Partners are related to each other.
PROPOSED TRANSACTIONS
17. The Partnership will be dissolved at a date ("that time") prior to its next fiscal year end of XXXXXXXXXX. This would be accomplished by the Partners passing an Ordinary Resolution consenting to such dissolution pursuant to Section 11.1, paragraph (b) of the Limited Partnership Agreement.
18. Immediately before "that time", each Partner will agree to assume their respective proportion of all of the Partnership liabilities and each Partner will receive his proportionate undivided interest in each Partnership property distributed. Thereafter the Partnership will cease to exist.
19. The liabilities of the Partnership that are assumed by each Partner cannot reasonably be regarded as a benefit conferred on any other member of the Partnership.
20. Immediately before "that time", each Partner will execute an agreement to authorize Co. A to sign the election form referred to in subsection 96(4) on their behalf for the purposes of making the joint election under subsection 98(3). Pursuant to subsection 96(4) of the Act, each Partner will jointly elect in respect of its interest in the Partnership, in prescribed form and within the time referred to in subsection 96(4), that each Partner's proceeds of disposition of its interest in the Partnership, the cost to each Partner of its undivided interest in the cash, prepaid amounts, and lands and buildings and the Partnership's proceeds of disposition of such properties shall be determined in accordance with the rules in subsection 98(3) of the Act.
21. General Partner Co., the Nominee, will execute a trust acknowledgment pursuant to which the Nominee will acknowledge that the Nominee holds title to the property and other assets as bare trustee for each of the Partners to the extent of the interest of that Partner in the Partnership prior to its dissolution at "that time".
22. The Partnership fiscal period which commenced on XXXXXXXXXX will be deemed to have ended immediately before "that time". The income for tax purposes of the Partnership for the period to "that time" will be determined on an accrual basis and Partnership information returns prepared for allocation of income to each Partner to be included in each Partner's income tax return for the current taxation year.
23. Immediately upon each Partner receiving its pro rata undivided interest in each parcel of land, each building, and each other Partnership property, Co. D will agree to acquire each Partner's (except Co. A's) interests in the lands and buildings and other Partnership property. The purchase price will be based on the fair market value of $XXXXXXXXXX determined for the entire interest in the Partnership property. The allocation of the purchase price between lands and buildings is $XXXXXXXXXX for lands and $XXXXXXXXXX for the buildings. This transaction will cause capital gains and full recapture to be realized by each of the vendors. As the undivided interest in each Partnership property will be owned by each Partner for only a moment in time, each Partner will not have income/loss for the ownership period.
24. Co. D and Co. A will enter into a purchase and sale agreement to transfer Co. A's interest in the Partnership property to Co. D. The parties will jointly elect under subsection 85(1) to defer the recognition of capital gains and recapture by Co. A on the lands and buildings.
PURPOSE OF PROPOSED TRANSACTIONS
25. The purpose of the proposed transactions is to facilitate the acquisition by Co. D (a wholly-owned subsidiary corporation of Co. A) of the XXXXXXXXXX% interest in the Partnership property held by the Partners (other than Co. A) through the Partnership so that the Partners (other than Co. A) realize on their investment on a taxable basis, and to facilitate the acquisition by Co. D of the XXXXXXXXXX% interest in the Partnership property currently held by Co. A through the Partnership on a tax deferred basis. The transfer of Co. A's undivided interest in the Partnership property to Co. D is designed to meet the corporate objectives of segregating fixed assets from business operations and to meet bank financing requirements.
RULINGS GIVEN
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our rulings are as set forth below:
A. The provisions of subsection 98(3) of the Act will apply to the dissolution of the Partnership as described in paragraph 17 above to, inter alia, deem the amount of each Partner's proceeds of disposition of its interest in the Partnership, the cost to each Partner of its undivided interest in the lands, buildings and other Partnership property, and the Partnership's proceeds of disposition of the lands and buildings.
B. For the purposes of determining the ACB to each Partner of that Partner's interest in the Partnership for the purposes of subsection 98(3), the Partner's share of the net income of the Partnership for the fiscal period that commenced on XXXXXXXXXX and will end immediately before "that time" will be added to the ACB of that Partner's interest in the Partnership as of the time immediately prior to "that time" pursuant to subparagraph 53(1)(e)(i).
C. For the purposes of determining the ACB to a Partner of each Partner's interest in the Partnership for the purposes of subsection 98(3), the liabilities described in paragraph 10 above and assumed by each Partner immediately before "that time", as described in paragraphs 18 and 19 above, will be added to the ACB of that Partner's interest in the Partnership as of the time immediately prior to "that time" pursuant to subparagraph 53(1)(e)(iv).
D. The undivided interest of each Partner in the lands and buildings is capital property of each Partner for the purposes of subdivision c of Part B of the Act.
E. The undivided interest of Co. A in the lands and buildings is eligible property of Co. A.
F. Subsection 245(2) will not be applied as a result of the proposed transactions, in and of themselves, to redetermine the tax consequences confirmed in the rulings given.
CAVEAT
Except as specifically described in the rulings given above, nothing in this letter should be construed as implying that the Canada Customs and Revenue Agency (CCRA) has agreed to or reviewed any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings above.
These rulings are given subject to the general limitations and qualifications set forth in Information Circular 70-6R3 (the "Circular") issued by the CCRA on December 30, 1996, and are binding provided the proposed transactions are completed 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. 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:
(i) the fair market value, ACB or UCC of any Partnership properties referred to in this letter;
(ii) the GST implications of any of the proposed transactions;
(iii) any other tax consequences of the proposed transactions or of related transactions or events that are not described herein.
Yours truly,
XXXXXXXXXX
for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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