2007 Ruling 2006-0198211R3 - Avoidance of subsection 149(10)

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 there is an avoidance and abuse of the "fresh start" rules in subsection 149(10)?

Position: No

Reasons: The proposed transactions include the creation of a taxable corporation; latent gains and recapture would be taxable in that corporation. Tax policy not offended.

XXXXXXXXXX 						2006-019821

XXXXXXXXXX, 2007

Re: Advance Income Tax Ruling
XXXXXXXXXX

This is in reply to your letters of XXXXXXXXXX, and your email correspondence of XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above-named taxpayer. We also acknowledge our various telephone conversations (XXXXXXXXXX) in furtherance of this matter.

To the best of your knowledge and that of the taxpayer involved, none of the issues contained in this ruling request are:

(i) dealt with in an earlier return of the taxpayer or a related person;

(ii) being considered by a tax services office or taxation centre of the Canada Revenue Agency ("CRA") in connection with a previously filed tax return of the taxpayer or a related person;

(iii) under objection by the taxpayer or a related person;

(iv) subject to a ruling previously issued by the Income Tax Rulings Directorate to the taxpayer or a related person; nor

(v) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired.

Unless otherwise stated, statutory references in this letter are to the Income Tax Act, R.S.C. 1985 (5th Suppl.) c. 1, as amended to the date hereof (the "Act").

Our understanding of the facts and proposed transactions is as follows:

Facts

1. The Corporation of the XXXXXXXXXX (the "Township") is a corporation created under XXXXXXXXXX without share capital that constitutes a municipality in Canada and it is thus exempt from income tax pursuant to paragraph 149(1)(c) of the Act. The tax services office and taxation centre that serve the Township are XXXXXXXXXX and XXXXXXXXXX, respectively. The Township's tax account number is XXXXXXXXXX.

2. The XXXXXXXXXX (the "Society") was formed on XXXXXXXXXX as a non-profit organization, exempt from income tax pursuant to paragraph 149(1)(l) of the Act, to solicit and receive gifts and bequests, and to raise money to be used for XXXXXXXXXX facilities in XXXXXXXXXX. The Society was also formed to promote capital projects for XXXXXXXXXX facilities and to supplement maintenance programs for such facilities in XXXXXXXXXX.

3. XXXXXXXXXX . ("DevCo") is a taxable Canadian corporation within the meaning assigned by subsection 89(1) of the Act and carries on a real estate development business. The real estate development projects currently undertaken by DevCo include projects located in the precinct of XXXXXXXXXX.

4. XXXXXXXXXX ("SubDevCo") is a taxable Canadian corporation within the meaning assigned by subsection 89(1) of the Act, and is a wholly-owned subsidiary corporation of DevCo. SubDevCo was incorporated under the laws of XXXXXXXXXX and is governed under the XXXXXXXXXX.

5. XXXXXXXXXX ("HeritageCo") was a taxable Canadian corporation within the meaning assigned by subsection 89(1) of the Act. HeritageCo was incorporated on XXXXXXXXXX under the laws of XXXXXXXXXX and is governed under the XXXXXXXXXX.

6. At XXXXXXXXXX, HeritageCo's share capital only consisted of XXXXXXXXXX Class "A" voting common shares issued and outstanding (the "Shares"). The sole registered owner of the Shares was XXXXXXXXXX. XXXXXXXXXX ("Vendors") were the sole beneficial owners of the Shares. The Vendors are resident in Canada for purposes of the Act.

7. HeritageCo owned, inter alia, the land, buildings, equipment, leases and other improvements, situated in XXXXXXXXXX, which is legally described as XXXXXXXXXX (the "Property"). The Vendors carried on a XXXXXXXXXX business (the "Business") on the Property.

8. Under a sale and purchase agreement dated XXXXXXXXXX (the "Sale and Purchase Agreement"), the Vendors agreed to sell to SubDevCo, the Shares for $XXXXXXXXXX (the "Purchase Price") on XXXXXXXXXX (the "Closing Date"). The Purchase Price was payable under the Sale and Purchase Agreement as follows:

a. $XXXXXXXXXX within XXXXXXXXXX business days of signing the Sale and Purchase Agreement;

b. $XXXXXXXXXX on the Closing Date (the "Initial Payment");

c. $XXXXXXXXXX on XXXXXXXXXX (the "Second Payment"); and

d. $XXXXXXXXXX on XXXXXXXXXX (the "Third Payment").

The Second Payment and Third Payment was secured by a mortgage granted by SubDevCo to the Vendors and registered against title to the Property in the principal amount of $XXXXXXXXXX and interest at XXXXXXXXXX% per annum, calculated annually.

9. XXXXXXXXXX.

10. On XXXXXXXXXX, SubDevCo assigned its interests under the Sale and Purchase Agreement (the "Assignment") to the Township for $XXXXXXXXXX. The Township also paid SubDevCo the following amounts: (i) $XXXXXXXXXX as a reimbursement of the deposit paid under the Sale and Purchase Agreement; (ii) $XXXXXXXXXX as reimbursement of the non-refundable payments made under the Sale and Purchase Agreement; (iii) $XXXXXXXXXX for SubDevCo's out-of-pocket costs incurred in respect of the Assignment. On the Closing Date, if Township had purchased the Shares under the Assignment, HeritageCo would have ceased to be a taxable Canadian corporation and would have been a corporation described in paragraph 149(1)(d.5) of the Act.

11. On XXXXXXXXXX, the Vendors, with the consent of the Township and SubDevCo, changed the name of HeritageCo to XXXXXXXXXX. ("PropertyCo").

12. PropertyCo newly incorporated a corporation under the laws of XXXXXXXXXX ("Opco") on XXXXXXXXXX. Opco is a taxable Canadian corporation within the meaning assigned by subsection 89(1) of the Act..

13. On XXXXXXXXXX, PropertyCo sold its shares in Opco to the Vendors for fair market value consideration.

14. On XXXXXXXXXX , with the concurrence of the Township, PropertyCo transferred all of its assets including goodwill attached to the name "HeritageCo", other than the Property, to Opco, in exchange for an assumption of current liabilities that belonged to PropertyCo and other non-share fair market value consideration. PropertyCo and Opco also entered into a lease agreement whereby Opco will carry on the Business on the Property.

15. Prior to the Closing Date, the Society incorporated a new corporation under the laws of XXXXXXXXXX ("Newco"). Newco is a taxable Canadian corporation within the meaning assigned by subsection 89(1) of the Act and Newco's authorized share capital consists of common shares of which only XXXXXXXXXX is issued and outstanding. Newco is governed under the XXXXXXXXXX.

16. Society subscribed for XXXXXXXXXX common shares of Newco. In this regard, Society was acting in its own capacity and not as agent of Township.

17. Township transferred its interests and rights under the Assignment to Newco for a non-interest bearing promissory note of $XXXXXXXXXX ("Promissory Note 1").

18. Newco granted an option (the "Option") to the Township to purchase the Property in exchange for a non-interest bearing promissory note of $XXXXXXXXXX ("Promissory Note 2"). Under the Option, Township can purchase the Property for fair market value consideration.

19. The Township and Newco offset Promissory Note 1 against Promissory Note 2.

20. Prior to the Closing Date, Township made a non-interest bearing loan of $XXXXXXXXXX to Newco, as evidenced by a promissory note ("Promissory Note 3"), in order to provide Newco with the necessary funds to make the Initial Payment, pursuant to the Sale and Purchase Agreement.

21. On the Closing Date, the Vendors sold the Shares to Newco pursuant to the terms of the Sale and Purchase Agreement. Thereafter, PropertyCo was the wholly-owned subsidiary of Newco.

Proposed Transactions

22. The transactions described below ("Proposed Transactions") will follow sequentially.

23. PropertyCo and Newco will be amalgamated (the "Amalgamation") to form one corporate entity ("Amalco"). As a consequence, all of the assets and liabilities of PropertyCo and Newco will become assets and liabilities of Amalco, and all the Shares will be cancelled. No shares of the capital stock of Amalco will be issued such that the issued and outstanding shares of the capital stock of Newco will become the shares of the capital stock of Amalco. This Amalgamation will be governed by subsection 87(1) of the Act. In connection with the Amalgamation, a designation will be made, in Amalco's return of income under Part I of the Act for its first taxation year, under the provisions of subsection 87(11) and paragraph 88(1)(d), to increase the adjusted cost base of certain capital property (other than ineligible property as defined in paragraph 88(1)(c)) owned by PropertyCo immediately before the Amalgamation, to the extent permitted under paragraph 88(1)(d), that PropertyCo owned without interruption at and since the time Newco last acquired control of PropertyCo and that became property of Amalco pursuant to the Amalgamation described in this paragraph. In particular, a designation will be made with respect to the land that is real property in the Property.

24. The Township will exercise the Option and acquire the beneficial ownership of the Property in exchange for a non-interest bearing promissory note of $XXXXXXXXXX ("Promissory Note 4") and the assumption of the Second Payment and the Third Payment described above.

25. The Township and Amalco will offset Promissory Note 3 against Promissory Note 4.

26. The Township will contribute capital to Amalco for Amalco to satisfy its liabilities, including income taxes payable, as needed.

27. Upon direction from the Township at a suitable time, Amalco will transfer legal title in the Property to the Township.

28. Amalco will be voluntarily dissolved XXXXXXXXXX.

Purpose of the Proposed Transactions

29. The purpose of the Proposed Transactions is to enable the Township to own the Property. If Township acquired the Shares directly from the Vendors, subsection 149(10) of the Act would apply. It was originally contemplated that the Township would acquire less than 90% of the shares of Newco so that Newco would not be a corporation described in paragraph 149(1)(d.5) of the Act and subsection 149(10) would not apply when Newco purchased the Shares. However, approval from the Inspector of Municipalities was not available on the Closing Date such that the Township was not able to acquire shares in Newco. Accordingly, the facts and Proposed Transactions have or will occur so that the Township may acquire the Property for the benefit of residents of the Township.

Rulings Given

Provided that the preceding statements constitute a complete and accurate disclosure of all relevant facts, Proposed Transactions and the purposes of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above, we confirm the following:

A. Newco will not be considered to be exempt from Part I tax by virtue of subsection 149(1) of the Act and, accordingly, the provisions of subsection 149(10) of the Act will not be applicable to PropertyCo, upon the acquisition of the Shares by Newco.

B. The provisions of subsections 87(11) and 88(1) will apply to the Amalgamation to the extent permitted by paragraph 88(1)(d) such that, provided that no property that became property of Amalco on such Amalgamation or "any property acquired by any person in substitution therefor" (within the meaning of that phrase for the purposes of clause 88(1)(c)(vi)(B)) is acquired by any person described in any of subclauses 88(1)(c)(vi)(B)(I), (II), or (III) (on the assumption that the "subsidiary" referred to in those subclauses is PropertyCo and the "parent" is Newco) as part of the series of transactions or events that includes the Proposed Transactions described herein, for purposes of the Act, the cost to Amalco of each property owned by PropertyCo at the time Newco acquired control of PropertyCo, and that became property of Amalco pursuant to the Amalgamation, will be deemed by paragraph 88(1)(c) to be the cost amount of such property plus, provided that such property is capital property but not depreciable property, the amount designated by Amalco under paragraph 88(1)(d) in respect of the property, as described in 23 of the Proposed Transactions above.

C. The provisions of subsection 245(2) of the Act will not be applicable as a result of the Proposed Transactions, in and of themselves, to re-determine the tax consequences confirmed in the above rulings.

Nothing in this ruling letter should be construed as implying that the CRA has agreed to or reviewed any tax consequences relating to the facts, Proposed Transactions and purpose of the Proposed Transactions described herein other than those specifically described in the rulings given above. In particular, nothing in this ruling should be construed as implying that the CRA has agreed to or reviewed:

(a) the determination of the fair market value or adjusted cost base of any property referred to herein, or the paid-up capital in respect of any share referred to herein;

(b) the undepreciated capital cost of any depreciable property referred to herein;

(c) the amount of any non-capital loss, net capital loss or any other amount of any corporation referred to herein;

(d) any provincial tax consequences of the Proposed Transactions;

(e) any tax consequences relating to the transfer of assets to and, more particularly, the tax consequences pertaining to the latent recapture or gain on depreciable property received;

(f) any GST implications; or

(g) any tax consequences relating to the facts and Proposed Transactions described herein other than those specifically confirmed in the rulings given above.

The above rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R5 issued on May 17, 2002, and are binding on the CRA provided that the proposed transactions are completed before XXXXXXXXXX.

The above rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act, which if enacted, could have an effect on the rulings provided herein.

This letter is based solely on the facts and Proposed Transactions described above. The documentation submitted with your request does not form part of the facts and Proposed Transactions and any references thereto are provided solely for the convenience of the reader.

Yours truly

XXXXXXXXXX
For Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch