2000 Ruling 2000-0038963 - Affiliated group of persons loss ATIL

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: Whether depreciable assets transferred to wholly-owned subsidiary were for the purposes of gaining or producing income

Position: Yes

Reasons: Depreciable Assets transferred as part of affiliated group loss utilization scheme were held for a period of 10 days to earn income

XXXXXXXXXX                                                           		  2000-003896

Attention: XXXXXXXXXX

XXXXXXXXXX , 2000

Dear Sirs:

Re: XXXXXXXXXX
Advance Income Tax Ruling

We are writing in response to your letter of XXXXXXXXXX in which you requested advance income tax rulings on behalf of the above-noted taxpayer. We acknowledge receipt of your letter of XXXXXXXXXX and our telephone conversations in connection herewith.

We understand that to the best of your knowledge and that of XXXXXXXXXX, none of the issues involved herein:

(a) is in an earlier return of XXXXXXXXXX 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 XXXXXXXXXX or a related person;

(c) is under objection by XXXXXXXXXX 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.

You advised that the proposed transactions described herein, will have no impact on outstanding tax liabilities of XXXXXXXXXX or a related person.

DEFINITIONS

In this letter unless otherwise expressly stated:

(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" and has the meaning assigned by section 54;

(c) "affiliated persons" has the meaning set out in subsection 251.1(1);

(d) XXXXXXXXXX;

(e) "CBCA" means the Canada Business Corporations Act;

(f) "CCA" means the expression "capital cost allowance" which refers to a deduction allowed under paragraph 20(1)(a);

(g) "depreciable property" has the meaning assigned by subsection 248(1);

(h) "non-capital losses" has the meaning assigned by subsection 111(8);

(i) "paid-up capital" has the meaning assigned by subsection 89(1);

(j) "public corporation" has the meaning assigned by subsection 89(1);

(k) "Regulations" means the Income Tax Regulations;

(l) "taxable Canadian corporation" has the meaning assigned by subsection 89(1); and

(m) "taxable income" has the meaning assigned by subsection 248(1).

FACTS

1. XXXXXXXXXX is a public corporation and a taxable Canadian corporation.

XXXXXXXXXX

2. XXXXXXXXXX owns all the shares of XXXXXXXXXX a taxable Canadian corporation incorporated under the CBCA. XXXXXXXXXX is a holding corporation which owns all the issued and outstanding shares of XXXXXXXXXX has a XXXXXXXXXX year-end.

3. XXXXXXXXXX is governed by the CBCA and is a taxable Canadian corporation.

XXXXXXXXXX

4. XXXXXXXXXX has a XXXXXXXXXX year-end. It is estimated that XXXXXXXXXX will incur a non-capital loss of approximately $XXXXXXXXXX for its XXXXXXXXXX taxation which includes a maximum CCA claim of approximately $XXXXXXXXXX .

5. XXXXXXXXXX is governed by the BCCA and is a taxable Canadian corporation. XXXXXXXXXX

All the issued and outstanding shares of XXXXXXXXXX are held by XXXXXXXXXX.

6. It is estimated that XXXXXXXXXX will report taxable income of approximately $XXXXXXXXXX for its XXXXXXXXXX taxation. XXXXXXXXXX forecasts taxable income in XXXXXXXXXX and subsequent years.

XXXXXXXXXX has a XXXXXXXXXX taxation year-end.

PROPOSED TRANSACTIONS

7. XXXXXXXXXX will transfer certain depreciable manufacturing and processing assets (collectively, the "Depreciable Assets") used in producing XXXXXXXXXX at its XXXXXXXXXX facility to XXXXXXXXXX. The estimates by prescribed class of capital cost and fair market value of the Depreciable Assets to be transferred to XXXXXXXXXX and UCC of all property of the respective prescribed class at XXXXXXXXXX is as follows:

(in $XXXXXXXXXX )

Prescribed Class Estimated Estimated UCC of
Capital Cost of Fair Market Value of Prescribed
Depreciable Assets Depreciable Assets Class as at
XXXXXXXXXX

XXXXXXXXXX

The fair market value of each property transferred of a prescribed class will be greater than the lesser of the capital cost of the particular property and the proportion of the UCC of that class based on the relative fair market value of the property over the fair market value of all properties of that class. For each prescribed class, properties will remain so that no terminal loss will be created. The transfer of the Depreciable Assets may result in a recapture of capital cost allowance but will not result in a capital gain.

In consideration for the transfer of the Depreciable Assets XXXXXXXXXX will issue to XXXXXXXXXX common shares.

8. In connection with the transfer of the Depreciable Assets described in paragraph 7 above, XXXXXXXXXX will jointly elect in prescribed form within the time limit referred to subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer. The agreed amount in respect of each depreciable property so transferred will not be less than the least of the amounts described in subparagraphs 85(1)(e)(i) to (iii) and will not be greater than the fair market value of such property.

XXXXXXXXXX will add to the stated capital account maintained for its common shares the amount of $XXXXXXXXXX.

9. The legal title of the Depreciable Assets and all incidents of ownership such as possession, use and risk will pass to XXXXXXXXXX after the signing of the purchase and sale agreement by XXXXXXXXXX will carry out all necessary steps to effect the transfer of legal and beneficial ownership of the Depreciable Assets including the following:

(a) the directors of XXXXXXXXXX will each convene a meeting to authorize the sale and purchase of the Depreciable Assets at fair market value;

(b) a purchase and sale agreement will be executed between XXXXXXXXXX providing, inter alia, for:

(i) the purchase price to be paid by the issuance of common shares by XXXXXXXXXX;

(ii) the parties' agreeing to file the required tax elections under federal and provincial legislation; and

(iii) the parties' agreeing to enter into an operating agreement, as described in paragraph 10 below; and

(c) XXXXXXXXXX will obtain all creditors' authorization for the transfer of the Depreciable Assets.

10. XXXXXXXXXX will enter into a contract such that XXXXXXXXXX will produce XXXXXXXXXX for XXXXXXXXXX and XXXXXXXXXX will be compensated at a fair market value rate. XXXXXXXXXX will supply all raw materials, necessary personnel, utilities, manufacturing and administrative support as well as building facilities to XXXXXXXXXX will convert raw materials supplied and owned by XXXXXXXXXX into XXXXXXXXXX for a net fee.

11. XXXXXXXXXX will claim the maximum CCA on the Depreciable Assets in its XXXXXXXXXX taxation year. The CCA claimed will reduce or eliminate the taxable income of XXXXXXXXXX for its taxation year ending on XXXXXXXXXX.

12. XXXXXXXXXX will be continued under the CBCA before the amalgamation described in paragraph 13 below.

13. On XXXXXXXXXX (referred to as "predecessor corporations") will undertake a vertical short-form amalgamation under the provisions of the CBCA to form a new corporation ("New XXXXXXXXXX") in such a manner that:

(a) all of the property (except for any amounts receivable from any predecessor corporation or shares of the capital stock of any predecessor corporation) of the predecessor corporations immediately before the amalgamation will become property of New XXXXXXXXXX by virtue of the amalgamation;

(b) all of the liabilities (except any amount payable to any predecessor corporation) of the predecessor corporations immediately before the amalgamation will become liabilities of New XXXXXXXXXX by virtue of the amalgamation;

(c) the common shares of XXXXXXXXXX held by XXXXXXXXXX immediately prior to the amalgamation will be cancelled by virtue of the amalgamation; and

(d) the shares of XXXXXXXXXX owned by its shareholder immediately before the amalgamation will become shares of New XXXXXXXXXX owned by that shareholder immediately after the amalgamation.

For greater certainty, the properties of the predecessor corporations acquired by New XXXXXXXXXX on the amalgamation described herein, would include the Depreciable Assets.

PURPOSE OF THE PROPOSED TRANSACTIONS

14. The purpose of the proposed transactions is to allow XXXXXXXXXX to claim CCA on the Depreciable Assets acquired from XXXXXXXXXX to reduce its taxable income for the taxation year ending XXXXXXXXXX.

RULINGS

Provided that the above statements are accurate and constitute complete disclosure of all of the relevant facts, proposed transactions and the purposes of the proposed transactions, we confirm the following:

A. On the transfer of the Depreciable Assets by XXXXXXXXXX to XXXXXXXXXX as described in paragraph 5 above:

(i) the provisions of subsection 85(1) will apply such that the agreed amounts will be deemed to be the proceeds of disposition of the Depreciable Assets to XXXXXXXXXX and the cost of the Depreciable Assets to XXXXXXXXXX;

(ii) for greater certainty, the provisions of paragraph 85(1)(e.2) will not apply to the transfer;

(iii) the provisions of subsection 13(21.2) will not apply;

(iv) the provisions of subsection 85(5) will apply to the transfer;

(v) the provisions of Regulation 1102(14) will apply to deem each property of the Depreciable Assets transferred to XXXXXXXXXX to be property of the same prescribed class as that of XXXXXXXXXX immediately before the transfer;

(vi) in respect of each property of the Depreciable Assets acquired by XXXXXXXXXX in respect of which the conditions described in Regulation 1100(2.2)(f) are met, the following rules will apply:

(a) no amount will be included under Regulation 1100(2)(a) in respect of the property; and

(b) each Class 24, Class 27, Class 29 and Class 34 asset of the Depreciable Assets will be deemed to be a "designated property" of the respective prescribed class to XXXXXXXXXX for the purposes of Regulation 1100(1)(ta);

(vii) XXXXXXXXXX will be entitled to deduct, pursuant to paragraph 20(1)(a), such CCA as is allowed by the Regulations, in computing income for its taxation year ending XXXXXXXXXX and the restriction in Regulation 1100(3) will not apply.

B. Upon the amalgamation of XXXXXXXXXX, as described in paragraph 13 above:

(i) by virtue of subsection 87(1.1), the provisions of subsection 87(1) will apply;

(ii) the provisions of paragraph 87(2)(a) will apply such that New XXXXXXXXXX will be deemed to be a new corporation the first taxation year of which will commence at the time of the amalgamation and XXXXXXXXXX will be deemed to have a taxation year end immediately before the amalgamation;

(iii) the provisions of paragraph 87(2)(d) will apply in determining the capital cost and UCC to New XXXXXXXXXX of depreciable property;

(iv) by virtue of paragraph 1102(14)(d) of the Regulations, depreciable property of a prescribed class of a predecessor corporation that is acquired by New XXXXXXXXXX upon the amalgamation will be deemed to be property of the same prescribed class to New XXXXXXXXXX;

(v) in respect of each depreciable property acquired by New XXXXXXXXXX in respect of which the conditions described in Regulation 1100(2.2)(g) are met, the following rules will apply:

(a) no amount will be included under Regulation 1100(2)(a) in respect of the property; and

(b) each Class 24, Class 27, Class 29 and Class 34 asset will be deemed to be a "designated property " of the respective prescribed class to New XXXXXXXXXX for the purposes of Regulation 1100(1)(ta); and

(vi) New XXXXXXXXXX will be entitled to deduct, pursuant to paragraph 20(1)(a), such CCA as is allowed by the Regulations, in computing income for its first taxation year.

C. The provisions of Regulation 1102(20) will not apply to the proposed transactions.

D. Subsections 15(1), 56(2), and 246(1) will not apply to the proposed transactions, in and by themselves.

E. Subsection 245(2) will not apply to the proposed transactions, in and by themselves, to redetermine the tax consequences confirmed in the ruling.

These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996 issued by Revenue Canada and are binding provided that the proposed transactions described in paragraphs 7, 9 and 10 are completed by XXXXXXXXXX.

These rulings are based on the Act as it currently reads and do not take into account any future amendments, whether currently proposed or not, to the Act.

COMMENTS

Nothing in this ruling should be construed as confirmation, express or implied, of:

(a) the determination of the fair market value, ACB or UCC of any property referred to herein; or

(b) the tax consequences of any transaction other than those described in the rulings given above.

Yours truly,

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