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: time at which suspended loss under 13(21.2) may be realized
Position: at time of first event described in 13(21.2)(e)(iii)
Reasons: in circumstances, hypothetical property deemed to be owned by one predecessor corporation following an amalgamation would not be property of the same class as similar property owned by the other predecessor corporation
XXXXXXXXXX 2005-012550
T. Harris
(613) 957-2114
July 25, 2005
Dear XXXXXXXXXX:
Re: Subsection 13(21.2) of the Income Tax Act
We are writing in response to your facsimile of April 12, 2005 wherein you requested our interpretation regarding the application of subsection 13(21.2) of the Income Tax Act (the "Act") to the hypothetical situation described in your request.
Situation
a) Holdco owns all of the issued and outstanding shares of each of Aco and Bco.
b) Aco and Bco operate separate and distinct businesses. Each of Aco and Bco has a December 31 taxation year and owns depreciable property, including leasehold improvements included in Class 13 of Schedule II to the Income Tax Regulations (the "Regulations").
c) On December 30th of year 1, Aco transfers all of its property, including the leasehold improvements, to a newly incorporated company ("Newco"), pursuant to subsection 85(1) of the Act. The fair market value of the Class 13 properties owned by Aco immediately before this transfer is less than their undepreciated capital cost. Following the transfer, Aco and Newco will be affiliated persons pursuant to paragraph 251.1(1)(c) of the Act. Consequently, the terminal loss that would otherwise have been realised by Aco on the transfer of its Class 13 properties to Newco will be suspended pursuant to subsection 13(21.2) of the Act (the "Suspended Loss").
d) On January 1 of year 2, Aco and Bco are amalgamated pursuant to the provisions of subsection 87(1) of the Act. The corporate entity resulting from this amalgamation will be referred to herein as Amalco.
e) At a subsequent date in year 2, all of the assets of Newco, including the leasehold improvements, are sold to a person that is not affiliated with any of Aco, Amalco or Newco (the "non-affiliated person").
Interpretation Requested
You have asked for our interpretation of when the Suspended Loss will be available for deduction by Amalco and whether, following the amalgamation and prior to the sale of Newco's assets, the Class 13 depreciable property that is deemed to have been owned by Aco prior to the amalgamation by virtue of paragraph 13(21.2)(e) of the Act will be included in a separate class of Amalco than the Class 13 assets previously owned by Bco.
It is your view that Amalco should be entitled to deduct the Suspended Loss in its taxation year in which Newco transferred all of its assets to the non-affiliated person as described in e) above. Your reasoning may be summarized as follows:
(i) Following the amalgamation of Aco and Bco, the Class 13 assets deemed to be owned by Aco pursuant to paragraph 13(21.2)(e) of the Act immediately before the amalgamation should be included in a separate class by virtue of subsection 1101(1) of the Regulations since each of Aco and Bco were carrying on separate and distinct businesses prior to the amalgamation.
(ii) Paragraph 87(2)(g.3) of the Act provides that, for the purposes of applying subsection 13(21.2) of the Act, to any property that was disposed of by a predecessor corporation, the amalgamated corporation is deemed to be the same corporation as, and a continuation of, each predecessor corporation. Given that Aco would have been entitled to deduct the Suspended Loss in its taxation year in which Newco transferred all of its assets to the non-affiliated person if the amalgamation had not occurred, permitting Amalco to deduct the Suspended Loss at that time would be consistent with paragraph 87(2)(g.3) of the Act.
Written confirmation of the income tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request as described in Information Circular IC 70-6R5 ("IC-70-6R5") dated May 17, 2002 issued by the Canada Revenue Agency ("CRA"). Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we can provide the following general comments that may be of assistance.
Subsection 13(21.2) of the Act will generally apply where depreciable property of a prescribed class has been disposed of by a person (the "transferor") to a transferee who is affiliated with the transferor and who continues to own the property 30 days after the transfer of the property (the "transferee") and the proceeds of disposition for the property are less than the lesser of:
A) the capital cost of the property, and
B) the proportion of the undepreciated capital cost of the property of that class that the fair market value of the transferred property is of the fair market value of all property of that class.
Subparagraph 13(21.2)(e)(iii) of the Act will deem the transferor to own a property that was acquired before the taxation year of the transferor that includes the date of the transfer having a capital cost that is equal to the excess of the proceeds of disposition over the lesser of the amounts referred to in A) or B) above and that is property of the same class as the transferred property. Subparagraph 13(21.2)(e)(iii) of the Act further provides that this hypothetical property will be deemed to be owned by the transferor until the time that is immediately before the first time after the transfer that one of the events described in any of clauses (A) to (E) thereof occurs (a "triggering event").
For the purposes of your enquiry, the relevant triggering event is found in clause 13(21.2)(e)(iii)(A) of the Act which provides that there will be a disposition of the hypothetical property at the time that is immediately before the first time after the transfer at which a 30-day period begins throughout which neither the transferor nor a person affiliated with the transferor owns or has a right to acquire the transferred property.
Although subparagraph 13(21.2)(e)(iii) of the Act deems this hypothetical property to be property of the same class as the transferred property, it does not stipulate that the hypothetical property is the same property, or used for the same purpose, as the transferred property. However, given that the hypothetical property is included in the same class as the transferred property, there is a presumption that the hypothetical property must be considered to be used by the transferee for the purpose of earning income, otherwise paragraph 1102(1)(c) would preclude this hypothetical property from being included in any of the classes described in Schedule II to the Regulations.
Consequently, for the purposes of applying subsection 1101(1) of the Regulations to the hypothetical property following the amalgamation referred to above, the hypothetical Class 13 property deemed to be owned by Aco immediately prior to the amalgamation would not be considered to have been acquired by Amalco for use in the same business as the Class 13 property acquired from Bco on the amalgamation. Since this hypothetical Class 13 property can only be depreciable property of a prescribed class where it is used for the purpose of earning income, for the purposes of applying subsection 1101(1) of the Regulations it would seem appropriate to consider it to have been acquired for the purpose of earning income from another business or from the hypothetical property. Consequently, the hypothetical Class 13 property should be included in a separate class from the Class 13 assets acquired from Bco.
Our comments are provided in accordance with the practice outlined in paragraph 22 of IC 70-6R5.
Yours truly,
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Planning Branch
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