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:
The XXXXXXXXXX is proposing to undertake a series of transactions that involve a trust structure in an effort to avoid the specific rule on incurring debt in paragraph 149.1(3)(d) and the issue is; will GAAR apply to this avoidance transaction?
Position TAKEN: No.
Reasons FOR POSITION TAKEN:
XXXXXXXXXX
XXXXXXXXXX 2000-003842
Attention: XXXXXXXXXX
XXXXXXXXXX, 2000
Dear Sirs
Re: Advance Income Tax Ruling
XXXXXXXXXX
This is in reply to your letter dated XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-noted taxpayer. We also acknowledge the information provided in subsequent correspondence and during our various telephone conversations in connection with your request XXXXXXXXXX.
We understand that to the best of your knowledge and that of the taxpayers involved:
i) none of the issues involved in the requested ruling is being considered by any District Tax Services Office or Taxation Centre of the Agency in connection with a tax return already filed, and
ii) none of the issues involved in the requested ruling is the subject of any notice of objection or is under appeal.
Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended, (the "Act") and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.
Our understanding of the facts and proposed transactions is as follows:
FACTS
1. XXXXXXXXXX ("Opco") was incorporated in XXXXXXXXXX and is a charitable foundation, a public foundation and a registered charity (#XXXXXXXXXX). The expressions "charitable foundation" and "public foundation" as well as "registered charity" as referred to here and subsequently have the meanings assigned by subsections 149.1(1) and 248(1) of the Act, respectively.
2. XXXXXXXXXX is a Canadian corporation. XXXXXXXXXX deals at arm's length with Opco.
3. Opco has made an offer to purchase (the "Offer to Purchase"), which has been accepted by XXXXXXXXXX, whereby Opco or its designee will purchase a lot of land (the "Real Property") located in XXXXXXXXXX from XXXXXXXXXX. The Offer to Purchase is conditional upon Opco obtaining a favorable advance income tax ruling regarding its acquisition of the Real Property on or before XXXXXXXXXX.
4. The Real Property is subject to a long-term triple net land lease which will be assigned to the transferee on the transfer of the Real Property. The tenant under the land lease is the XXXXXXXXXX. The remaining term on the land lease is approximately XXXXXXXXXX years.
5. The purchase price of the Real Property and accompanying land lease is $XXXXXXXXXX which is to be paid by deposit and cash on closing in the amount of $XXXXXXXXXX and by mortgage financing to the extent of $XXXXXXXXXX.
PROPOSED TRANSACTIONS
6. A new inter-vivos trust (the "Trust") will be created by way of a trust indenture (the "Trust Indenture") for purposes of completing the purchase of the Real Property. The relevant terms and conditions of the Trust, as set out in the Trust Indenture, will be as follows:
(a) The settlor of the Trust will be Opco, which will contribute between $XXXXXXXXXX and $XXXXXXXXXX as the initial trust property (the "Settlement Property"). Of the initial trust property, $XXXXXXXXXX will be used to fund the deposit and cash on closing under the terms of the Offer to Purchase, while the remaining balance of the Settlement Property will be used to fund the acquisition costs in relation to the purchase transaction;
(b) There will be XXXXXXXXXX trustees (the "Trustees") of the Trust at all times, being XXXXXXXXXX designated officers of Opco. The powers and duties of the Trustees will be specifically defined in the Trust Indenture;
(c) The sole income and capital beneficiary of the Trust will be Opco, or any successor thereto;
(d) The fiscal period of the Trust will end on XXXXXXXXXX each year. All income earned and all capital gains realized or deemed to be realized by the Trust in each calendar year will be payable to Opco on XXXXXXXXXX of such calendar year and the terms of the Trust Indenture will specifically provide that Opco shall be entitled to enforce payment of such amounts at any time thereafter; and
(e) The Trust shall terminate on XXXXXXXXXX of the first calendar year following the full repayment of the mortgage loan financing obtained by the Trust on the original acquisition of the Real Property, at which time the remaining property of the Trust shall be distributed to Opco in satisfaction of its capital interest in the Trust.
7. The Trust will use $XXXXXXXXXX of the original settlement property to pay the deposit and cash on closing and will arrange with a financial institution to borrow $XXXXXXXXXX by way of mortgage financing to fund the balance of the purchase price on closing of the purchase transaction.
8. The mortgage financing will be limited recourse, meaning that the lender's sole recourse in the event of a default by the Trust under the terms of the loan will be to foreclose on the Real Property.
9. Based upon current projections, the mortgage financing will be repaid in approximately XXXXXXXXXX years, at which time the Trustees will distribute the Real Property and assign the land lease to Opco on XXXXXXXXXX of the following year in satisfaction of Opco's capital interest in the Trust, at which time the Trust will terminate.
Opco's address is as follows:
XXXXXXXXXX.
Opco's business number is XXXXXXXXXX.
PURPOSE OF PROPOSED TRANSACTIONS
Opco considers the purchase of the Real Property to be an excellent investment opportunity which will provide a superior income stream to enable it to carry out its charitable purpose. The investment is also very low risk, given the nature of the land lease, given the tenant under the land lease, and given the non-recourse nature of the mortgage-secured financing that is being arranged. However, Opco is concerned that a direct borrowing by it for the mortgage financing may be considered by the Agency to be a debt caught by the restrictions in paragraph 149.1(3)(d) of the Act. By creating the Trust to purchase the Real Property and to incur the mortgage-secured debt, the prohibition on incurring debt in paragraph 149.1(3)(d) of the Act will not be triggered by Opco as the Trust will be incurring such debt, with Opco acquiring an interest in the Trust as its investment.
RULINGS
Provided the above descriptions of facts, proposed transactions and purposes of the proposed transactions are accurate and constitute complete disclosure of all the relevant facts and proposed transactions and that the proposed transactions are carried out as set out herein, we confirm the following:
A Any income or loss from the Settlement Property or property substituted therefor (within the meaning of paragraph 248(5)(a) of the Act) held by the Trust, and any taxable capital gain or allowable capital loss from the disposition by the Trust of property substituted for the Settlement Property shall, while Opco is resident in Canada, be deemed to be income or a loss, as the case may be, or a taxable capital gain or allowable capital loss, as the case may be, of Opco pursuant to subparagraph 75(2) of the Act.
B. Any income of the Trust (including taxable capital gains) other than income referred to in "A" above will be included in computing the income of Opco under subsection 104(13) of the Act and will be deductible in computing the income of the Trust under subsection 104(6) of the Act.
C. Subsection 245(2) of the Act will not be applicable as a result of the proposed transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given.
The above rulings are based on the Act in its present form and do not take into account any proposed amendments thereto.
The above rulings are given subject to the general limitations and qualifications set forth in Information Circular 70-6R3 issued on December 30, 1996 and is binding on the Canada Customs and Revenue Agency provided that the proposed transactions are completed before XXXXXXXXXX.
Except as expressly stated herein, nothing in this ruling should be construed as implying that the Canada Customs and Revenue Agency has accepted, approved or confirmed any income tax implications in connection with the facts or proposed transactions referred to herein.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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