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 subsection 66.7(16) applies with regard to a Canadian resource property, owned by a corporation at the time of an acquisition of control, where that property is subsequently sold and then reacquired.
Position: Yes - General comments provided.
Reasons: Based upon application of the relevant legislation to the hypothetical fact situation.
2006-016833
XXXXXXXXXX A.A. Cameron
(613) 347-1361
June 16, 2006
Dear XXXXXXXXXX:
Re: Subsection 66.7(16)
This is in reply to your letter of January 19, 2006 requesting a written technical interpretation concerning the above-mentioned subsection of the Income Tax Act (the "Act") with regard to a hypothetical situation.
In your letter, you have described a situation involving two corporations ["A Co" and "B Co", each being a taxable Canadian corporation within the meaning assigned by subsection 89(1) of the Act,], which are not related persons for purposes of the Act, and each carrying on a respective oil and gas business. A Co acquires shares giving it control of B Co such that B Co is deemed to be a "successor" pursuant to subsection 66.7(10) of the Act with regard to Canadian resource property ["CRP" as defined in subsection 66(15) of the Act] owned by it at that time. B Co subsequently sells certain of this successored CRP (each a "transferred CRP") to A Co at fair market value in a transaction where the rules contained in section 66.7 of the Act (the "successor rules", for purposes of this letter ignoring the Income Tax Application Rules) do not apply. At a later date, B Co reacquires a transferred CRP from A Co at fair market value also in a transaction where the successor rules do not apply. You have asked that we confirm your view that the provisions of subsection 66.7(16) of the Act would not apply to B Co upon the reacquisition of the successor CRP.
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 70-6R5 dated May 17, 2002 issued by the Canada Revenue Agency. A fee is charged for this service. Although, we are unable to provide any comments with respect to your particular fact situation otherwise than in the form of an advance income tax ruling, the following general comments may be of assistance.
Subsection 66.7(16) was enacted, applicable to taxation years ending after February 17, 1987, as part of the amendments that permitted the successor rules to apply to any number of transfers of resource properties (the "new successor rules"). As noted in your letter, subsection 66.7(16) of the Act reads:
Where at any time a Canadian resource property or a foreign resource property is acquired by a person in circumstances in which none of subsection 29(25) of the Income Tax Application Rules and subsections (1) to (5) apply, every person who was an original owner or predecessor owner of the property by reason of having disposed of the property before that time shall, for the purpose of applying those subsections to or in respect of the person or any other person who after that time acquires the property, be deemed after that time not to be an original owner or predecessor owner of the property by reason of having disposed of the property before that time.
Also as noted in your letter, the Technical Notes issued by the Department of Finance (which were dated June 3, 1987, the "Technical Notes") indicate, at page 35 thereof, that:
New subsection 66.7(16) of the Act provides that where a particular Canadian resource property or foreign resource property is acquired by a person in circumstances in which the successor rules do not apply, every person who was an original owner or predecessor owner of the property by reason of having previously disposed of the property shall, for the purposes of applying the successor rules to future owners of the property, be treated as never having been an original owner or predecessor owner of the property. Thus, the income from such properties thereafter will not qualify any expenses of a predecessor or original owner for a deduction in the hands of a successor.
In our view, while under the new successor rules a "third or subsequent" successoring is not precluded as discussed in the Technical Notes, subsection 66.7(16) of the Act requires that there be an unbroken chain or series of acquisitions of the CRP in question to which the successor rules have applied in order for a corporation acquiring the CRP to be a successor corporation that may be entitled to deduct successored resource expenses incurred by an original owner or predecessor owner of the CRP. Once a successored CRP has been transferred in a transaction to which the successor rules do not apply, subsection 66.7(16) will apply in respect of any person that subsequently acquires the CRP, including a previous owner of the successored CRP.
In light of the above, it is our view that the provisions of subsection 66.7(16) of the Act would apply to the situation where a taxpayer has acquired CRP in a transaction to which the successor rules applied and, by means of subsequent transfers to which the successor rules do not apply, the taxpayer has disposed of and then reacquired the particular CRP.
As a result of the application of subsection 66.7(16) of the Act, upon the reacquisition of the CRP by the taxpayer the original owner that incurred the successored resource pools would no longer be considered to be an original owner of the reacquired CRP. Consequently, in our view any income from the reacquired CRP could not be used by the taxpayer (or any subsequent acquirer thereof) to access the successored resource pools. On the other hand, in our opinion, the provisions of subsection 66.7(16) of the Act would not cause the original owner of the successored CRP to cease to be an original owner with regard to any successored CRP that has been continuously owned by the taxpayer throughout the period following its acquisition to which the successor rules applied. In other words, it is our view that resource expenses that were successored at the time that the CRP was acquired from the original owner may be deducted from income realized by the taxpayer from such successored CRP, which it has continually owned throughout the period.
Our comments are provided in accordance with the practice outlined in paragraph 22 of IC-70-6R5. We trust our comments are of assistance.
Yours truly,
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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