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.
Principal Issues: Whether the partnership interest acquired by the individual is "substituted property" within the extended definition in paragraph 88(1)(c.3) for the purposes of the bump denial rules.
Position: Yes
Reasons: Legislation
XXXXXXXXXX 2004-005925
Karen Cooper, LL.B.
February 25, 2004
Dear XXXXXXXXXX:
Re. Paragraph 88(1)(c) "Bump"
This is in reply to your letter dated January 27, 2004 in which you requested our comments with respect to the interpretation of paragraph 88(1)(c) of the Income Tax Act (hereinafter the "Act"). Specifically, you have queried whether subparagraph 88(1)(c)(vi) of the Act will apply to deny the "bump" with respect to property of a subsidiary in a particular fact situation.
Facts
1. Purchaseco is a taxable Canadian corporation incorporated to acquire shares of Targetco. The shares of Purchaseco are owned by a Canadian partnership (the "Partnership") held by unrelated persons. No partner has a majority interest.
2. Targetco is a taxable Canadian corporation that holds land as its principal asset.
3. Subsequent to, and as part of the series of transactions which includes, the acquisition of Targetco shares by Purchaseco, a former shareholder of Targetco will acquire a 25% interest in the Partnership (the "Partnership Interest"). The former shareholder sold its 34% interest in Targetco to Purchaseco for cash proceeds.
4. Following the acquisition of Targetco, Purchaseco will amalgamate with Targetco and wishes to "bump" the cost of the land pursuant to paragraphs 87(11)(b) and 88(1)(c) of the Act.
The situation outlined in your letter appears to be a factual one, involving specific taxpayers. As explained in Information Circular 70-6R5, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an Advance Income Tax Ruling. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office for their views. However, we are prepared to offer the following general comments which may be of assistance.
Generally, property acquired on an amalgamation pursuant to subsection 87(11) of the Act may be denied the benefit of a bump by virtue of subparagraph 88(1)(c)(vi) where, as part of the series of transactions that includes the amalgamation, the parent (or, in the case of an amalgamation, the purchasing corporation) acquires control of the subsidiary corporation and any property acquired by the amalgamated corporation or "any other property acquired by any other person in substitution therefor" ("substituted property") is acquired by "prohibited" persons (including specified shareholders of the subsidiary corporation). Pursuant to subparagraph 88(1)(c.3)(i) of the Act, substituted property is defined to include property other than "specified property" that is owned by a person after the acquisition of control of the subsidiary by the parent, the fair market value of which is, at that time, wholly or partially attributable to property distributed to the parent on the winding-up.
In our view, the Partnership Interest may be considered to be substituted property within the meaning of the extended definition in subparagraph 88(1)(c.3)(i) of the Act. This is because the fair market value of the Partnership Interest is at least partially attributable to the fair market value of the land acquired by Purchaseco upon the amalgamation of Purchaseco and Targetco and because the Partnership Interest is not a specified property within the meaning of paragraph 88(1)(c.4) of the Act. Because the former shareholder of Targetco acquires the Partnership Interest after the acquisition of control by Purchaseco of Targetco and is a specified shareholder of Targetco before that acquisition the land will be ineligible property pursuant to subclause 88(1)(c)(vi)(B)(I) of the Act.
We trust that these comments are helpful.
Yours truly,
David Palamar
Manager
Corporate Reorganizations Section III
Income Tax Rulings Directorate
Policy and Planning Branch
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