2008 Ruling 2007-0239871R3 - Post butterfly transactions

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 sale of partnership units results in paragraph 55(3.1)(c) denying the butterfly exemption.

Position: Paragraph 55(3.1)(c) is not applicable.

XXXXXXXXXX 						2007-023987

XXXXXXXXXX , 2008

Re: Sale of Partnership Interest
XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX , in which you requested an advance income tax ruling on behalf of the taxpayers. You have advised that to the best of your knowledge, and that of the responsible officers of each of the taxpayers, none of the issues involved in this Ruling is

(a) in an earlier tax return of one of the taxpayers or any related person;

(b) being considered by a tax services office or taxation centre in connection with a previously filed tax return of one of the taxpayers or a related person;

(c) under objection by one of the taxpayers or a related person;

(d) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; or

(e) the subject of a ruling previously issued by the Income Tax Rulings Directorate.

You have also advised that to the best of your knowledge, and that of the responsible officers of each of the taxpayers, that the proposed transactions will not result in any of the taxpayers or any related person described herein being unable to pay its existing outstanding tax liabilities.

DEFINITIONS

In this letter, all references to monetary amounts are in Canadian dollars and the following terms or expressions have the meaning specified:

(a) "Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1, as amended from time to time and consolidated to the date of this letter and, unless otherwise expressly stated, every reference herein to a part, section or subsection, paragraph or subparagraph and clause or subclause is a reference to the relevant provision of the Act, and the Income Tax Regulations thereunder are referred to as the "Regulations";

(b) "arm's length" has the meaning assigned by subsection 251(1);

(c) "BN" means the tax identification number assigned by CRA to the particular entity;

(d) "CRA" means the Canada Revenue Agency;

(e) "distribution" has the meaning assigned by subsection 55(1);

(f) "fair market value" ("FMV") means the highest price available in an open and unrestricted market, between informed, prudent parties, acting at arm's length and with no compulsion to act, expressed in terms of cash;

(g) "Paragraph" refers to a numbered paragraph in this advance income tax ruling;

(h) "Proposed Transaction" means the transaction described in Paragraphs 17;

(i) "related person" has the meaning assigned by section 251;

(j) "series of transactions or events" includes the transactions or events referred to in subsection 248(10);

(k) "SIN" means Social Insurance Number; and

(l) "taxable Canadian corporation" has the meaning assigned by subsection 89(1);

In addition, the following individuals, corporations and entities will be referred to as follows:

(i) "DC" means XXXXXXXXXX

(ii) "Partnership" means XXXXXXXXXX ;

(iii) "Sib1" means XXXXXXXXXX

(iv) "Sib2" means XXXXXXXXXX

(v) "TC1" means XXXXXXXXXX and

(vi) "TC2" means XXXXXXXXXX

FACTS

1. DC obtained an advance income tax ruling from the CRA Income Tax Rulings Directorate issued on XXXXXXXXXX (the "Ruling"), prior to the implementation of the divisive butterfly reorganization.

2. The divisive butterfly reorganization (the "Reorganization") was implemented on XXXXXXXXXX in accordance to the steps set out in the Ruling.

3. TC1 and TC2 each received certain properties from DC on XXXXXXXXXX on the Reorganization.

4. CRA form T2057s were filed by all the respective parties involved in the Reorganization.

5. TC1 acquired ownership of a XXXXXXXXXX % limited partnership interest in the Partnership on the Reorganization.

6. TC2 acquired ownership of a XXXXXXXXXX % limited partnership interest (the "Interest") in the Partnership on the Reorganization. Sib2 is the sole director and president of TC2.

7. The other limited partners of the Partnership are Sib1 (XXXXXXXXXX %) and the XXXXXXXXXX (XXXXXXXXXX % - the "XXXXXXXXXX Trust").

8. The XXXXXXXXXX Trust is an arm's length party to Sib1, Sib2, TC1 and TC2.

9. The XXXXXXXXXX Trust also operated the general partner (XXXXXXXXX ) of the Partnership. It was responsible for running the land development projects, management, and finance.

10. After the Reorganization, costs of the Partnership were increasingly not controlled adequately, and construction defects are increasingly evident. Leasing over the past XXXXXXXXXX years has been dismal, and the XXXXXXXXXX Trust has failed to lease more than XXXXXXXXXX % of the office building located at XXXXXXXXXX .

11. Due to these poor results, cash injections are needed for the Partnership's current cash flow drain and more equity is required than had been expected to fund future developments. The partners are no longer in agreement on investing additional funding to proceed with further development for the Partnership, as was the original intention of all parties.

12. Recently, the partners have been unable to reach agreement on what to do with the XXXXXXXXXX fully built-up properties of the Partnership, XXXXXXXXXX . Accordingly, the partners decided to divest of XXXXXXXXXX these properties. To this end, a listing agreement was entered into XXXXXXXXXX with a mandate to sell XXXXXXXXXX the properties.

13. The other activities of the Partnership, which cause cash strain, relate to the development of the balance of the lands owned by the Partnership. In order to accomplish this development, significant and costly work must be done with the municipalities and regional authorities, road allowances need be given, roads need to be built, and other planning strategies need to be analyzed and acted upon, all on a mutually agreeable basis, and all at significant cost. There are differences in opinion among the partners with respect to the desire to inject cash and additional resources into the Partnership to accomplish these activities.

14. XXXXXXXXXX

15. Sib2, by herself, does not have the same experience as Sib1 in the area of development. Although DC would regularly buy new land and develop it while she was together in business with Sib1, it was Sib1 who regularly undertook the development efforts of DC.

16. In contrast, Sib1 is an experienced developer. He is active and has a full staff to assist in development in TC1 and is willing to manage and finance his portion of the projects in the Partnership.

17. Sib2 had no intention of causing TC2 to sell the Interest at the time of the Reorganization. XXXXXXXXXX .

PROPOSED TRANSACTION

18. TC2 proposes to sell to TC1 the Interest. The selling price will be the current fair market value of the Interest.

PURPOSE OF THE PROPOSED TRANSACTION

19. XXXXXXXXXX

20. The motivating factors in Sib2's desire to cause TC2 to sell the Interest to TC1 are as follows:

a. XXXXXXXXXX ; and

b. Limited financial resources to inject funds into the Partnership in order to meet the increased funding requirements of the development projects.

21. As a result, Sib2 is willing to cause TC2 to sell the Interest to TC1 for FMV.

RULING

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transaction and the purpose of the Proposed Transaction, and provided that the Proposed Transaction is completed in the manner described above, our ruling is as set forth below.

Paragraph 55(3.1)(c) of the Act should not apply, as a result of the proposed divestiture of the Interest held by TC2, to deny the application of paragraph 55(3)(b) to exempt the application of subsection 55(2) to the dividend received by TC2 on the wind-up of DC as described in ruling F of the Ruling.

The above ruling is subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002 and is binding on CRA provided that the Proposed Transaction is completed by XXXXXXXXXX . The above ruling is based on the law as it presently reads and does not take into account any proposed amendments to the Act and the Regulations which, if enacted into law, could have an effect on the ruling provided herein.

OTHER COMMENTS

Unless otherwise confirmed in the above ruling, nothing in this letter should be construed as implying that the CRA has confirmed, reviewed or has made any determination in respect of any other tax consequence relating to the facts, Proposed Transaction or any transaction or event taking place either prior to the Proposed Transaction or subsequent to the Proposed Transaction, whether described in this letter or not, other than those specifically described in the rulings given above, including whether the Proposed Transaction would also be included in a series of transactions or events that include other transactions or events that are not described in this letter.

Yours truly,

XXXXXXXXXX
Manager
Corporate Reorganizations Section II
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch