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 CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues: 88(1)(d) bump on property that loses its capital nature on acquisition of control
Position: Favourable ruling issued
Reasons: Requirement to be capital property of subsidiary at the time of acquisition of control
XXXXXXXXXX 2001-010869
XXXXXXXXXX, 2002
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
XXXXXXXXXX
This is in reply to your letter of XXXXXXXXXX in which you request an advance income tax ruling on behalf of the above named 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 taxpayer involved, none of the issues involved in the ruling request:
(i) is in an earlier return of the taxpayer or a related person;
(ii) is 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) is under objection by the taxpayer or a related person;
(iv) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; or
(v) is the subject of a ruling previously issued by the Income Tax Rulings Directorate;
The taxpayer has advised that the proposed transactions described herein, will not affect the ability of the taxpayer to pay its outstanding tax liabilities.
Unless otherwise stated all references to a statute herein are to the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.), c. 1, as amended to the date hereof, (the "Act").
Our understanding of the facts, proposed transactions and the purpose of the proposed transactions is as follows:
FACTS
1. XXXXXXXXXX ("Farmco"), is a taxable Canadian corporation, as defined in subsection 89(1) of the Act, engaged in the business of farming. Farmco is serviced by the XXXXXXXXXX Tax Services Office and files its tax return at the XXXXXXXXXX Taxation Centre.
2. All of the issued and outstanding shares of Farmco are owned by members of the XXXXXXXXXX family (as summarized in the schedule below), all of whom are resident in Canada. The paid-up capital, as defined in subsection 89(1) of the Act, of the issued and outstanding shares of the capital stock of Farmco is $XXXXXXXXXX.
Name Number and Class
XXXXXXXXXX XXXXXXXXXX Class A
XXXXXXXXXX Class B
XXXXXXXXXX Common
XXXXXXXXXX XXXXXXXXXX Common
XXXXXXXXXX XXXXXXXXXX Common
XXXXXXXXXX XXXXXXXXXX Common
XXXXXXXXXX XXXXXXXXXX Common
XXXXXXXXXX XXXXXXXXXX Common
XXXXXXXXXX XXXXXXXXXX Common
XXXXXXXXXX XXXXXXXXXX Common
XXXXXXXXXX XXXXXXXXXX Common
3. Farmco's principal asset is XXXXXXXXXX land located in the XXXXXXXXXX (the "Land") and is currently used by Farmco in the business of farming. The Land represents capital property, within the meaning assigned by section 54 of the Act, to Farmco, with an adjusted cost base of approximately $XXXXXXXXXX. Adjusted cost base has the meaning assigned by section 54 of the Act. The Land is not a depreciable property (as defined in subsection 13(21) of the Act).
4. XXXXXXXXXX ("Developer") is a taxable Canadian corporation, as defined in subsection 89(1) of the Act, engaged in the business of real estate development. Developer is interested in acquiring Farmco's Land for the purpose of development and resale. Developer deals at arm's length, within the meaning assigned by subsection 251(1) of the Act, with Farmco and each of its shareholders.
5. Since XXXXXXXXXX Developer has carried out certain activities (listed below, referred to herein as "Development Activities") which will lead to the future development of the Land. Throughout this process and up until the sale of the Farmco shares in 7 below ("Closing"), Farmco continued and will continue to Closing to farm the Land as part of its farming operation. Prior to Closing there will not be any changes to the Land, and no work will commence with regard to the installation or construction of any road, water supply, sewage disposal or storm water management facilities. The Developer has undertaken, on its own account and not as agent for Farmco, the following Development Activities in respect of the future development of the Land:
? XXXXXXXXXX was retained by Developer to review the development potential of the Land. This review required site inspections, reviewing planning requirements of the City of XXXXXXXXXX ("City") Official Plan and Zoning By-Law. The Developer was presented with a number of potential development scenarios for consideration.
? Developer retained the services of a licensed archaeologist to determine the extent to which the Land contained archaeological resources (e.g. arrow heads, pottery, remains of other buildings, etc.). A report was prepared and submitted to the Province of XXXXXXXXXX.
? Developer retained a consultant to complete a traffic study to determine the potential impact, if any, the proposed development of the Land would have on the existing road systems.
? Developer retained XXXXXXXXXX to complete a vegetation overview plan report to determine location, quality and retention potential of existing vegetation on the Land.
? Developer retained XXXXXXXXXX to complete a topographic survey of the Land to establish elevations and contours. Preparation of this survey did not result in any physical alterations or changes to the Land.
? XXXXXXXXXX made a submission on behalf of Developer to ensure that the Land was identified in the City's Staging of Development Report and would be scheduled for consideration in XXXXXXXXXX. The Staging of Development Report matches the timing of municipal services with the timing of development and to establish a priority to when development applications would be considered.
? XXXXXXXXXX prepared a preliminary subdivision plan and submitted it to the City for review and comment. The plan was revised based on the feedback from the City.
? The City retained XXXXXXXXXX to conduct an environmental assessment of the XXXXXXXXXX. This environmental assessment is necessary because the Land will drain into a watercourse referred to as the XXXXXXXXXX. The cost of this environmental assessment will be borne by Developer.
? XXXXXXXXXX submitted a complete application and supporting plans and reports that are required prior to consideration of the applications for plan of subdivision draft plan approval and rezoning.
? XXXXXXXXXX submitted a letter to the City's Legal Department advising the City of the need to consider the closure of XXXXXXXXXX.
? The City accepted the applications as complete and commenced formal circulation to various agencies for their review and comment.
? XXXXXXXXXX commenced with the engineering design based on the proposed plan. The proposed plan has not been approved, consequently the engineering design is not final.
? XXXXXXXXXX received copies of initial replies to the circulation by the City of the applications for plan of subdivision. XXXXXXXXXX is in the process of reviewing these comments and formulating the response to any concerns or issues raised.
6. Earlier this year, Farmco sold XXXXXXXXXX land zoned for industrial use to a buyer unrelated to Farmco, any of its shareholders, and Developer.
PROPOSED TRANSACTIONS
7. Developer will purchase all of the issued and outstanding shares of Farmco from members of the XXXXXXXXXX family. The purchase price to be paid will be $XXXXXXXXXX. $XXXXXXXXXX cash will be paid on Closing and the remainder will be paid as XXXXXXXXXX equal annual instalments.
8. Developer and Farmco (referred to in this paragraph as "predecessor corporations") will amalgamate under the provisions of the XXXXXXXXXX to form a new corporation ("Amalco") in such a manner that:
(a) all of the property (except any amounts receivable from any predecessor corporation or shares of the capital stock of any predecessor corporation) of the predecessor corporations immediately before the merger will become property of Amalco by virtue of the merger;
(b) all of the liabilities (except any amounts payable to any predecessor corporation) of the predecessor corporations immediately before the merger will become liabilities of Amalco by virtue of the merger; and
(c) all shares of Farmco will be cancelled on the amalgamation and the shareholders of Developer will be the shareholders of Amalco.
The provisions of section 80 of the Act will not reduce the cost amount of the Land to Farmco on the amalgamation of Developer and Farmco.
9. In filing its first income tax return for its first taxation year, Amalco will designate an amount (the "Designated Amount") in respect of the Land. The Designated Amount will not exceed the amount by which the aggregate adjusted cost base to Developer of all its shares of Farmco immediately before the amalgamation exceeds the amount described in subparagraph 88(1)(d)(i) of the Act. The Designated Amount will not exceed the amount by which the fair market value of Farmco's interest in the Land at the time Developer acquires the shares of Farmco exceeds the cost amount, as defined in subsection 248(1) of the Act, to Farmco of the Land immediately before the amalgamation. No amount will be designated by Amalco in respect of any other property of Farmco.
10. Neither Developer nor any corporation with which it does not deal at arm's length will have received any amount as a taxable dividend (as defined in subsection 89(1) of the Act), a capital dividend (as defined in subsection 83(2) of the Act) or a life insurance capital dividend (as defined in former subsection 83(2.1) of the Act as it read prior to the enactment of S.C. 1986 c. 6) in respect of any shares of Farmco.
11. It is the intention that Amalco will develop, for resale, the Land acquired by it on the amalgamation of Developer and Farmco.
PURPOSE OF THE PROPOSED TRANSACTIONS
The proposed transactions will permit Developer to acquire, indirectly through the acquisition of the shares of Farmco, the Land which it intends to develop and sell. Developer and Farmco are amalgamating in order to obtain direct ownership of the Land and to have the cost of acquiring the Farmco shares recognized in respect of the underlying Land.
RULINGS REQUESTED AND GIVEN
Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions, and purpose of the proposed transactions and provided further that the proposed transactions are carried out as described above, our rulings are as follows:
A. pursuant to paragraph 87(11)(a) Developer will be deemed to have disposed of its shares in Farmco on the amalgamation for proceeds equal to the greater of the amounts determined pursuant to subparagraphs 88(1)(b)(i) and (ii) of the Act; and
B. provided that the Land is a capital property of Farmco at the time that Developer acquires control of Farmco and that the Land acquired by Amalco on the amalgamation of Developer and Farmco or any other property acquired by any person in substitution therefor (within the meaning of that phrase for the purposes of clause 88(1)(c)(vi)(B)) is not acquired by any person described in any of subclauses 88(1)(c)(vi)(B)(I), (II) or (III) (on the assumption that the "subsidiary" referred to in those subclauses is Farmco and the "parent" is Developer or Amalco, as the context requires) as part of the series of transactions or events that includes the acquisition of control of Farmco by Developer and the amalgamation of Developer and Farmco, pursuant to paragraphs 88(1)(c) and (d) of the Act, the cost to Amalco of the Land will be deemed to be the amount deemed by paragraph 88(1)(a) of the Act to be the proceeds of disposition of the Land to Farmco, plus, subject to the provisions of subparagraphs 88(1)(d)(ii) and (iii) of the Act, such portion of the amount, if any, by which
(a) the aggregate of the adjusted cost base to Developer of its shares of Farmco immediately before the amalgamation of Developer and Farmco,
exceeds
(b) the aggregate of the amounts determined under subparagraphs 88(1)(d)(i) and (i.1) of the Act,
as is designated by Amalco in respect of the Land in its first return of income under Part I of the Act for its first taxation year.
The rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R4 dated January 29, 2001 and are binding on the Canada Customs and Revenue Agency provided that the proposed transactions are completed before XXXXXXXXXX. These rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act.
You have requested a ruling concerning whether the Development Activities would alter the nature of the property to Farmco. We are not able to grant a ruling on this matter because it involves an issue that is largely dependent on all of the facts. It is our opinion, however, that the Development Activities, in and of themselves, would not necessarily change the nature of the Land from a capital property to a trading property.
Nothing in this letter should be construed as implying that Canada Customs and Revenue Agency has agreed to or reviewed:
(a) the determination of the adjusted cost base or fair market value of any property referred to herein or the paid-up capital of any shares; or
(b) any tax consequences relating to the facts or proposed transactions described herein other than those specifically described in the rulings given above.
Yours truly,
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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