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: 1. Can a corporation be a business agency of an incorporated congregation? 2. Can a wholly-owned subsidiary of a business agency be a business agency of the congregation? 3. Does the transfer of an asset to a congregation paid as a dividend in kind constitute a non-event for tax purposes? 4. What are the tax implications of transferring the legal title of a business asset from a congregation to a business agency or the wholly-owned subsidiary of a business agency?
Position: 1. Yes 2. Likely no. Depends on the facts; who actually owns all the shares of the corporation. 3. Would likely not constitute a taxable event. 4. If the corporation is a business agency of the congregation then likely no tax implications of transferring title, but if not transferred to a business agency then result would be same as transfer between regular corporations.
Reasons: 1. Definition of congregation says it may be incorporated. 2.The legislation does not refer to indirect ownership; definition of business agency was amended, reference to "control" deleted. 3. It is a transfer within the same inter vivos trust. 4. If a business agency, then transfer within the same deemed inter vivos trust; if not, regular transfer of assets.
2009-031433
XXXXXXXXXX Lori Merrigan
(613) 957-8979
October 22, 2009
Dear XXXXXXXXXX :
Re: Taxation of Corporations Controlled by Communal Organizations
This is in response to your letter of March 17, 2009, inquiring about the tax treatment of corporations that are owned or controlled by communal organizations as described in section 143 of the Income Tax Act (the "Act"). Specifically, you have asked the following questions:
1. Where an incorporated congregation owns all of the shares of a corporation (Newco1), is that corporation a business agency of the congregation?
2. If Newco1 is a business agency of the congregation, and Newco1 owns all of the shares of another corporation (Newco2), would that corporation also be considered to be a business agency of the congregation?
3. Would the payment of an asset as a dividend in kind, from a business agency to a congregation, be a disposition for tax purposes?
4. What are the income tax implications of transferring legal title of business assets from the name of the incorporated congregation to either Newco1 or Newco2?
The situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. 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, "Advance Income Tax Rulings". This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the internet at http://www.cra-arc.gc.ca. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office ("TSO") for their views.
Unless otherwise specified, any references to sections, subsections, paragraphs and subparagraphs are references to the Act.
Legislation
The term "congregation" is defined in subsection 143(4) and means, "a community, society or body of individuals, whether or not incorporated." Subsection 143(1) provides that where a congregation or its business agencies carry on business, an inter vivos trust is deemed to exist and the following rules apply:
- Where the congregation is a corporation, the corporation is deemed to be the trustee having control of the trust property (paragraph 143(1)(e));
- The members of the congregation are deemed to be the beneficiaries under the trust (paragraph 143(1)(i));
- The property of the congregation is deemed to be property of the trust (paragraph 143(1)(c)); and
- The property of each business agency of the congregation is deemed to be property of the trust (paragraph 143(1)(d)).
The term "business agency", "of a congregation", as defined in subsection 143(4),
"...means a corporation, trust or other person, where the congregation owned all the shares or the capital stock of the corporation or every interest in the trust or other person."
Subsidiary as Business Agency
The definition of "congregation" includes a community, society or body of individuals whether incorporated or not. Therefore, as a congregation can be incorporated, and the term "congregation" is used in the definition of a business agency, it is our view that where an incorporated congregation owns all of the shares of another corporation, that corporation is considered to be a business agency of the congregation for the purpose of subsection 143(4).
Status of Subsidiary of Business Agency Corporation
Because Newco1 is a business agency of the incorporated congregation, the property of Newco1, including all of the shares of Newco2, are held in the deemed trust. Since the incorporated congregation is deemed to be the trustee of the deemed trust, you have asked whether this is sufficient to conclude that the shares of Newco2 are then owned by the congregation such that Newco2 is a business agency. In our view, it is not clear that holding property in trust, as a trustee, is equivalent to "owning" property, especially where the trust is a deemed trust established solely for purposes of the Act.
Furthermore, prior to 2001, the definition of the term "business agency" read:
" 'business agency', of a congregation at any time in a particular calendar year, means
(a) a corporation ... where the congregation owned all the shares of the capital stock of the corporation (except directors' qualifying shares) ... or
(b) a corporation ... of which the congregation
(i) has effective management or control throughout the portion of the particular year throughout which both the congregation and the corporation ... were in existence, and
(ii) had effective management or control during a taxation year of the corporation ... that began before March 1999 and ended in the particular year; ..."
As set out in paragraph (b) above, the prior definition of business agency included a corporation of which the congregation had effective management or control. Under this definition, Newco2 would likely have been found to be a business agency of the congregation.
The amendment to this definition in 2001 deleted the reference to "effective management or control" and retained only the reference to owning "all the shares of the capital stock". No reference to wholly-owned subsidiaries or directly- or indirectly-controlled corporations was added at that time. We note that other provisions of the Act, such as paragraph 149(1)(d.2), specifically contemplate extending specific tax treatment to wholly-owned subsidiaries. For these reasons, it is our view that the term "business agency" cannot be expanded to include indirectly-owned corporations. Therefore, it is unlikely that Newco2 would be considered to be a business agency of the congregation.
Transfer of Property as Dividend in Kind
Our document 9617155 states that:
"... income earned by the Corporation will be income of the trust and not income or surplus of the Corporation. Consequently, a distribution by the Corporation to the trust will not be considered to be a dividend and will not ordinarily constitute a taxable event (as it would be a transfer of property within the same inter vivos trust)."
This document appears to address a situation involving a cash distribution. You ask whether the tax consequences would be similar where a business agency transfers an asset by paying a dividend in kind to the congregation. Subsection 52(2) of the Act provides that a shareholder may receive property on account or in lieu of a dividend payable and is deemed to have acquired that property at a cost equal to its fair market value and the corporation is deemed to have disposed of the property at that time for proceeds equal to that fair market value. However, in our view, in the case of a distribution between a business agency and the congregation within the same deemed trust, subsection 52(2) would not apply. As explained in our document referred to above, it would be a transfer of property within the same inter vivos trust; generally, neither a distribution of cash nor a distribution of property would constitute a taxable event in these circumstances.
Transfer from Congregation to Subsidiary
You inquire whether there are any income tax implications in transferring the legal title of a business asset from the incorporated congregation to either Newco1 or Newco2. As Newco1 would be a business agency of the congregation in accordance with subsection 143(4), the assets of both the congregation and Newco1 would be deemed to be held in the same trust, and there would generally be no tax consequences in transferring legal title of business assets from the congregation to Newco1.
However, since it has been determined that Newco2 would likely not be a business agency of the congregation, a similar transfer from the congregation to Newco2 would be treated in the same way as any transfer of assets between corporations. Consequently, there may be a gain or a loss on the disposition unless a rollover provision, such as subsection 85(1), applies.
We trust that these comments will be of assistance.
Yours truly,
Eliza Erskine
A/Manager
Non-Profit Organizations and Aboriginal Issues
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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