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: Does the administrative position described in document number 2001-0073995 concerning the application of paragraphs 85(1)(d) and (e) in the context of divisive reorganizations governed by subsection 55(3) still stand?
Position: Yes.
Reasons: Consistent with previous statements.
XXXXXXXXXX 2006-017288
March 7, 2006
Dear XXXXXXXXXX:
This is in reply to your letter of February 21, 2006. All statutory references given herein are to the Income Tax Act. You requested a technical interpretation with respect to the application of paragraphs 85(1)(d) and (e) in the following situation:
- Opco has three shareholders who are not related for the purposes of section 55.
- One of the shareholders wants to exit the corporation and continue on with his own corporation, Newco. A single wing butterfly is undertaken under paragraph 55(3)(b). As part of that butterfly,
o That shareholder transfers his Opco shares to Newco.
o Opco transfers to Newco its share of each type of property of Opco under section 85. Those assets include depreciable property of various classes and eligible capital property as defined in subsection 248(1).
You asked us to confirm that the agreed amount under paragraphs 85(1)(d) and (e) in respect of the business assets transferred to Newco can be determined based on their proportionate undepreciated capital cost and cumulative eligible capital as defined in subsection 248(1) (respectively designated as the "UCC" and "CEC") and not based on the total UCC and CEC balance of Opco.
Written confirmation of the 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 submitted in the manner set out in Information Circular 70-6R5, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. The following comments are, therefore, of a general nature only and are not binding on the Canada Revenue Agency.
Document 2001-0073995 indicates that it is generally acceptable in most divisive reorganizations governed by paragraphs 55(3)(a) and (b) to use the proportionate UCC and CEC of assets being transferred. That administrative position has been applied consistently in numerous advance income tax rulings (a recent ruling which applied that position is 2005-014483).
Absent exceptional circumstances, we confirm that for the purpose of applying subparagraph 85(1)(e)(i) to the transaction described above, the reference to "the undepreciated capital cost to the taxpayer of all property of that class" could ordinarily be read to mean the proportion of Opco's UCC of all of the property of that class immediately before the transfer to Newco that the fair market value of the transferred assets of that class immediately before the transfer is of the fair market value of all property of that class immediately before the transfer.
We also confirm that for the purpose of applying subparagraph 85(1)(d)(i) to that transaction, the reference to "4/3 of the taxpayer's cumulative eligible capital in respect of the business immediately before the disposition" could ordinarily be read to mean the proportion of 4/3 of Opco's CEC in respect of its business that the fair market value of the transferred eligible capital property immediately before the transfer to Newco is of the fair market value of all the eligible capital property of Opco's business immediately before the transfer.
Circumstances might militate for the use of cost, rather than fair market value, to allocate the undepreciated capital cost or the cumulative eligible capital to the property being transferred in the context of a transaction governed by subsection 55(3).
We trust the above comments will be of assistance to you.
Yours truly,
Mark Symes
Manager
Corporate Reorganizations Section I
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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