2001 Ruling 2001-0079463 - XXXXXXXXXX . - REPLACEMENT PROPERTY

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 a foreign affiliate of a taxpayer resident in Canada is eligible for the replacement property rules in subsections 13(4) and 44(1) of the Income Tax Act?

Position: Yes.

Reasons: (i) The term "taxpayer" is defined in subsection 248(1) to include any person whether or not liable to pay tax; and (ii) a controlled foreign affiliate computes income under Part I of the Act for FAPI purposes and sections 3 and 9 of the Act refer to "income of a taxpayer".

XXXXXXXXXX 2001-007946

XXXXXXXXXX, 2001

Dear XXXXXXXXXX:

Re: XXXXXXXXXX
Advance Income Tax Ruling

We are writing in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-referenced taxpayer.

XXXXXXXXXX tax affairs are administered by the XXXXXXXXXX Tax Services Office and it files its tax returns at that office under Account Number XXXXXXXXXX.

To the best of your knowledge and that of the taxpayers involved, none of the issues involved with this request:

(i) is involved in an earlier return of the taxpayers or a related person;

(ii) is being considered by a tax services office or a taxation centre in connection with a tax return already filed by the taxpayers or a related person;

(iii) is under objection; or

(iv) is before the courts or, if a judgement has been issued, the time limit for appeal has not expired.

Definitions

In this letter the following terms have the meanings specified:

(a) "Act" means the Income Tax Act R.S.C. 1985 c.1 (5th Supp.), 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 provisions of the Act;

(b) "active business" is defined under subsection 95(1);

(c) "Canco" means XXXXXXXXXX;

(d) "FA" means XXXXXXXXXX;

(e) "adjusted cost base" has the meaning assigned under section 54;

(f) "capital property" has the meaning assigned under section 54;

(g) "CCPC" means Canadian-controlled private corporation as defined under subsection 125(7);

(h) "controlled foreign affiliate" has the meaning assigned by subsection 95(1);

(i) "cost amount" has the meaning assigned under subsection 248(1);

(j) "FAPI" means foreign accrual property income as defined under subsection 95(1);

(k) "paid-up capital" has the meaning assigned under subsection 89(1); and

(l) "taxable Canadian corporation" has the meaning assigned under subsection 89(1).

Facts

Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:

1. Canco is a taxable Canadian corporation and a CCPC which was incorporated on XXXXXXXXXX under the Canada Business Corporations Act.

2. The issued and outstanding share capital of Canco consists of :

(i) XXXXXXXXXX Class E preferred shares having an aggregate redemption amount, paid-up capital and adjusted cost base of $XXXXXXXXXX;

(ii) XXXXXXXXXX Class F preferred shares having an aggregate redemption amount, paid-up capital and adjusted cost base of $XXXXXXXXXX; and

(iii) XXXXXXXXXX Class A common shares having an aggregate paid-up capital and adjusted cost base of $XXXXXXXXXX.

3. All of the issued and outstanding Class E preferred shares of Canco are held by XXXXXXXXXX, a CCPC which is related, within the meaning of subsection 251(2), to Canco. All of the issued and outstanding Class F preferred shares and common shares of Canco are held in equal proportions (i.e., XXXXXXXXXX% each) by XXXXXXXXXX companies, namely, XXXXXXXXXX each of which is related to Canco.

4. FA was incorporated on XXXXXXXXXX under the laws of the State of XXXXXXXXXX, U.S.A. The only issued and outstanding share capital of FA consists of XXXXXXXXXX common shares having a par value of $XXXXXXXXXX and a total paid-in amount of $XXXXXXXXXX in U.S. currency. All of these common shares are held by Canco. Therefore, FA is a controlled foreign affiliate of Canco.

5. The primary activity of FA is the rental of real property and its income, which does not constitute income from the conduct of an active business, is therefore FAPI and has been reported and included in computing the income of Canco for Canadian tax purposes.

6. FA's major assets consist of land, buildings thereon purchased in XXXXXXXXXX, and a real estate leasehold interest purchased in XXXXXXXXXX adjacent to the land and buildings. These assets are situated in the City of XXXXXXXXXX and are presently leased until year XXXXXXXXXX on a "net-net" basis to a single arm's length tenant. As of XXXXXXXXXX, these assets have the following tax attributes in Canadian funds:

(i) Land: Cost amount was $XXXXXXXXXX;

(ii) Buildings: Capital cost was $XXXXXXXXXX and cost amount was $XXXXXXXXXX; and

(iii) Leasehold interest: Capital cost was $XXXXXXXXXX and cost amount was $XXXXXXXXXX.

7. All the above-noted FA's real estate holding ("FA Property") is the object of an intended forced sale to XXXXXXXXXX. This offer was substantially less than the fair market value of the property and was therefore rejected by FA.

Proposed Transactions

8. Following judgment by the Court having jurisdiction, or in the event that FA and the XXXXXXXXXX authorities reach an agreement as to the compensation package for the FA Property described in paragraphs 6 and 7 above, FA will, before the end of the second taxation year following the taxation year in which the proceeds of disposition of the FA Property become receivable (taking into consideration the provision of subsection 44(2)), acquire a capital property ("New Property") that would be a replacement property described in subsections 13(4.1) and 44(5), to replace all or part of the FA Property, under terms and conditions which will qualify it to elect under section 1033 of the Internal Revenue Code ("IRC"). Such an election in the U.S. will defer recognition of all or part of the gains from the disposition of the FA Property for U.S. tax purposes that would otherwise be realized as a result of the proposed involuntary sale of the FA Property to XXXXXXXXXX. FA will then proceed to elect under section 1033 of the IRC.

9. FA will, in accordance with the conditions and in the manner prescribed in either subsection 13(4) or 44(1) of the Act, elect in its return of income in Canada for the taxation year of FA in which FA acquires the New Property.

Purpose of the Proposed Transactions

10. The purpose of the proposed transactions is for FA to reinvest the proceeds of the disposition of the FA Property in another real property in the U.S. and to avail itself of the entitlement to defer capital gains and the recapture of capital cost allowance by electing under subsection 13(4) or 44(1).

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 follows:

A. FA is considered to be a taxpayer for the purposes of subsections 13(4) and 44(1).

B. The proposed disposition of the FA Property described in paragraph 7 and the first part of paragraph 8 above meets the condition specified in (d) of the definition of "proceeds of disposition" in each of subsection 13(21) and section 54 of the Act.

C. Provided that

(i) FA acquires the New Property in the manner described in paragraph 8 above,

(ii) the New Property will not be disposed of by FA before the time FA disposes of the FA Property, and

(iii) FA files an election pursuant to subsection 13(4) or 44(1) in accordance with the manner described in paragraph 9 above,

the rules in paragraphs 13(4)(c), 13(4)(d), 44(1)(e) and 44(1)(f) will apply to the proposed transactions described in paragraphs 8 and 9 above.

The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R4 dated January 29, 2001, and are binding on the Canada Customs and Revenue Agency ("CCRA") provided that the proposed transactions are completed by XXXXXXXXXX.

These rulings are based on the Act in the present form and do not take into account amendments to the Act which, if enacted into law, could have an effect on the rulings provided herein.

Other Comments

Nothing in this ruling should be construed as implying that the CCRA has agreed to or reviewed

(i) the adjusted cost base, capital cost, cost amount or paid-up capital of any property described herein; and

(ii) any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above.

Yours truly,

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

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