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: Whether section 84.1 applies to a particular situation involving the sale of a partnership interest?
Position: It could apply to deem a dividend to apply.
Alternatively, GAAR may apply .
Reasons: It would depend on whether the partnership ceased to exist.
Where one of the transactions is an avoidance transaction, GAAR may be applicable.
XXXXXXXXXX F. Harrison
2003-003742
January 9, 2004
Dear XXXXXXXXXX:
This is in reply to your letter of August 26, 2003, wherein you requested a technical interpretation in respect of the application of section 84.1 of the Income Tax Act (the "Act') to the following situation:
- Husband and Wife have been partners in a dairy operation since 1993;
- On January 1, 2003, Opco was incorporated. Husband and Wife purchased 51 and 49 common shares, respectively, for nominal consideration, representing 100% of the issued share capital stock of Opco;
- On January 1, 2003 the partnership transferred all of its assets to, and had all of its liabilities assumed by Opco. An election was filed under subsection 85(2) with an elected amount equal to the cost amount of the assets transferred. As consideration therefor, the partnership took back a note with a principal amount equal to the excess of the cost amount of the assets less the liabilities assumed by Opco and received redeemable, retractable preferred shares of Opco with a redemption value equal to the excess of the fair market value of the assets over the cost amount of the assets;
- As a result of the transactions, all the assets necessary to operate the dairy farm are held by Opco. The partnership assets are comprised of preferred shares in and a note receivable from Opco;
- During 2003 and 2004, Husband and Wife perform farm labour and management services for the corporation on behalf of the partnership;
- During 2004, Newco is incorporated. Husband and Wife purchase 51 and 49 common shares respectively for nominal consideration, representing 100% of the issued share capital of Newco;
- On January 1, 2005, Husband sells his partnership interest to Newco. A joint election is filed under subsection 85(1) with an elected amount equal to the adjusted cost base of the partnership interest plus $500,000 such that the capital gain realized by Husband is equal to his capital gain exemption. As consideration therefor, Husband takes back a note with a principal amount equal to the elected amount and receives redeemable, retractable preferred shares in Newco with a redemption amount equal to the excess of the fair market value of the partnership interest over the elected amount. The partnership interest meets the definition "interest in a family farm partnership" under subsection 110.6(1);
- On January 2, 2005, Wife follows the same steps as Husband and sells her partnership interest to Newco;
- Consequently, the partnership will cease to exist and Newco will be the sole owner of the preferred shares in and the note receivable from Opco.
It is your view that section 84.1 will not apply with respect to the transfers by Husband and Wife of the partnership interests to Newco.
We question the validity of the partnership during the 2003 and 2004 taxation years. In this regard, we note the court decision of Phillip Douglas Backman v. Her Majesty the Queen, 2001 DTC 5149, wherein the Supreme Court of Canada provides comments with respect to the existence of a partnership. If the partnership ceased to exist on January 1, 2003, Husband and Wife would be the owners of the preferred shares in and the note receivable from Opco. Consequently, section 84.1 would apply to the transfers by Husband and Wife, on January 1, 2005, of the preferred shares of Opco to Newco.
Alternatively, we would consider the application of section 245 to the series of transactions. Paragraph 25 of Information Circular IC 88-2 discusses the situation where, as a result of a series of transactions, a shareholder realizes a capital gain on the disposition of property that should have been accounted for as a dividend. Where one of the transactions in a series of transactions is an avoidance transaction, within the meaning of subsection 245(3), subsection 245(2) may be applied to the transaction if it is determined that the series of transactions was carried out to thwart the purpose of section 84.1. This determination can only be made after a complete review of the circumstances of an actual transaction.
The above comments are an expression of opinion and, as noted in Information Circular 70-6R5, are not binding on the Canada Customs and Revenue Agency.
Yours truly,
Mark Symes
Corporate Reorganizations Section 1
Reorganizations and Resources Division
Income Tax Rulings Directorate
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