2013 Ruling 2012-0472721R3 - Inter-vivos share transfer under 73(4) and (4.1)

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. Will anti-avoidance provisions of ss.69 and 245 (GAAR) apply to the proposed dispositions of QFP?

Position: See response.

Reasons: Facts and law

XXXXXXXXXX
2012-047272

XXXXXXXXXX, 2013

Dear XXXXXXXXXX:

Re: XXXXXXXXXX
Advance Income Tax Ruling Request

This is in reply to your letter of XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of the above-noted taxpayers. We also acknowledge the additional information provided in your subsequent fax and emails as well as during our telephone conversations (XXXXXXXXXX), concerning the facts and the proposed transactions described in your original letter. The information or the documents submitted by you are part of this letter only to the extent described herein. You have advised that to the best of your knowledge, and that of the taxpayers involved, none of the issues contained herein is:

i) in an earlier tax return of the taxpayers or a related person;

ii) being considered by a Tax Services Office or a Taxation Centre in connection with any tax return previously filed by the taxpayers or a related person;

iii) under objection by the taxpayers or a related person;

iv) before the courts or judgment has been issued; or

v) 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 above-noted taxpayers, the proposed transactions will not result in any of the above-noted taxpayers being unable to pay their existing outstanding tax liabilities.

DEFINITIONS

In this letter, all monetary amounts are expressed in Canadian dollars unless otherwise indicated, and the following terms or expressions have the meaning specified:

a) "Act" means the Income Tax Act (Canada), 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 hereunder are referred to as the "Regulations";

b) "adjusted cost base ("ACB")" has the meaning assigned by section 54;

c) "BN" means the business number assigned to the particular entity by the CRA;

d) "capital gains deduction ("CGD") means the amount available to be deducted against taxable income, as described in subsection 110.6(2);

e) "Child 1" means XXXXXXXXXX;

f) "Child 2" means XXXXXXXXXX;

g) "cost amount" has the meaning assigned by subsection 248(1);

h) "CRA" means the Canada Revenue Agency;

i) "disposition" has the meaning assigned by subsection 248(1);

j) "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 under no compulsion to act, expressed in terms of cash;

k) "Farmco" means XXXXXXXXXX, a corporation more fully described in Paragraphs 1 and 2;

l) "Individual 1" means XXXXXXXXXX;

m) "Individual 2" means XXXXXXXXXX;

n) "paid-up capital" has the meaning assigned by subsection 89(1);

o) "Paragraph" refers to a numbered paragraph in this letter;

p) "Prescribed Shares" has the meaning assigned by subsections 6205(1) and 6205(2) of the Regulations;

q) "proceeds of disposition"("POD") has the meaning assigned by section 54;

r) "Proposed Transactions" means the transactions described in Paragraph 10;

s) "qualified farm property" ("QFP") has the meaning assigned in subsection 110.6(1);

t) "related persons" has the meaning assigned by section 251;

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

v) "share of the capital stock of a family farm corporation" has the meaning assigned in subsections 70(10) and 110.6(1), respectively, as the case may be; and

w) "SIN" means the social insurance number.

FACTS

1. Farmco is a taxable Canadian corporation incorporated under the laws of XXXXXXXXXX. Farmco has carried on a family owned and operated XXXXXXXXXX farming business in Canada since XXXXXXXXXX. Farmco files its corporate tax returns at the XXXXXXXXXX Taxation Centre and its tax affairs are otherwise administered by the XXXXXXXXXX Tax Services Office.

2. Farmco uses the accrual basis of accounting for income tax purposes. Farmco's farm property primarily consists of land, buildings, equipment and cash which have been used principally in its farming business carried on in Canada.

3. Farmco's share capital is comprised of:

(i) XXXXXXXXXX authorized voting common shares having a par value of $XXXXXXXXXX each. XXXXXXXXXX common shares have been issued. Individual 1 and Individual 2 each own XXXXXXXXXX common shares.

(ii) XXXXXXXXXX authorized and issued non-voting preferred shares having a par value of $XXXXXXXXXX and a redemption value of $XXXXXXXXXX per share. The preferred shares do not carry any prescribed dividends. Individual 1 and Individual 2 each own XXXXXXXXXX preferred shares.

Farmco currently has only two shareholders, Individual 1 and Individual 2. Individual 1 and Individual 2 are not related persons.

4. The above described share structure of Farmco resulted from a reorganization that took place on XXXXXXXXXX, as part of an estate freeze. At that time, Individual 1 and XXXXXXXXXX, owned all of the common shares of Farmco equally. As part of that reorganization, both Individual 1 and XXXXXXXXXX received XXXXXXXXXX preferred shares of Farmco in exchange for their common shares of Farmco and each claimed a CGD for QFP on their respective share exchanges. Farmco also issued XXXXXXXXXX new common shares to each of Individual 1 and XXXXXXXXXX at that time. While XXXXXXXXXX, XXXXXXXXXX was actively engaged on a regular and continuous basis in the family farming business carried on by Farmco.

5. Individual 2 is the XXXXXXXXXX of XXXXXXXXXX. On XXXXXXXXXX, as a consequence of XXXXXXXXXX, Individual 2 inherited XXXXXXXXXX common and XXXXXXXXXX preferred shares of Farmco.

6. Child 1 is the adult child of Individual 1 and Child 2 is the adult child of Individual 2. Child 1 and Child 2 are not related persons.

7. Individual 1, Individual 2, Child 1 and Child 2 are all residents of Canada for the purposes of the Act and each such person is, and has been, actively engaged on a regular and continuous basis in the family farming business carried on by Farmco.

8. Currently, the issued and outstanding shares of Farmco have an estimated aggregate FMV of approximately $XXXXXXXXXX. The ACB and approximate FMV of the issued and outstanding common shares and preferred shares of Farmco owned by Individual 1 and Individual 2 are as follows:

Number of Shares ACB FMV

Individual 1

Common Shares XXXXX $ XXXXX $ XXXXX
Preferred Shares XXXXX $ XXXXX $ XXXXX

Individual 2

Common Shares XXXXX $ XXXXX $ XXXXX
Preferred Shares XXXXX $ XXXXX $ XXXXX

9. In XXXXXXXXXX, a dividend in the amount of $XXXXXXXXXX per share was paid on the issued and outstanding Farmco common shares. However, while no other dividends have been paid by Farmco on the common shares or preferred shares of Farmco, the common shares and preferred shares of Farmco described in Paragraph 8 are considered to be Prescribed Shares.

PROPOSED TRANSACTIONS

10. Individual 1 and Individual 2 propose to transfer their respective shares of Farmco as follows:

(i) Individual 1 will transfer XXXXXXXXXX common shares and XXXXXXXXXX preferred shares of Farmco to Child 1. As sole consideration for Individual 1's XXXXXXXXXX common shares, Child 1 will issue an interest bearing promissory note payable on demand having a principal amount and FMV equal to $XXXXXXXXXX. As sole consideration for Individual 1's XXXXXXXXXX preferred shares, Child 1 will issue an interest bearing promissory note payable on demand having a principal amount and FMV equal to $XXXXXXXXXX. The interest on the promissory notes to be issued by Child 1 will be payable monthly, based on the prescribed rate of interest at that time as set out under paragraph (c) of section 4301 of the Regulations. In the event of Individual 1's death, the outstanding unpaid amount on the notes will be forgiven by XXXXXXXXXX estate.

(ii) Individual 2 will transfer XXXXXXXXXX common shares and XXXXXXXXXX preferred shares to Child 2. As sole consideration for Individual 2's XXXXXXXXXX common shares, Child 2 will issue an interest bearing promissory note payable on demand having a principal amount and FMV equal to $XXXXXXXXXX. As sole consideration for Individual 2's XXXXXXXXXX preferred shares, Child 2 will issue an interest bearing promissory note payable on demand having a principal amount and FMV equal to $XXXXXXXXXX. The interest on the promissory notes to be issued by Child 2 will be payable monthly, based on the prescribed rate of interest at that time as set out under paragraph (c) of section 4301 of the Regulations. In the event of Individual 2's death, the outstanding unpaid amount on the notes will be forgiven by XXXXXXXXXX estate.

ADDITIONAL INFORMATION

11. Child 1 and Child 2 do not intend to dispose of their Farmco shares (or any property substituted for such shares) or to enter into an arrangement to dispose of such shares (or any property substituted for such shares) for the foreseeable future.

12. Each of the issued and outstanding shares of Farmco to be transferred as described in Paragraph 10 has been and is expected to be a share of the capital stock of a family farm corporation at that time.

13. Child 1 and Child 2 each expect to continue to be actively engaged on a regular and continuous basis in the family farming business carried on by Farmco for the foreseeable future.

PURPOSES OF THE PROPOSED TRANSACTIONS

14. The primary purpose of the Proposed Transactions is to allow each of Individual 1 and Individual 2 to utilize their CGD for QFP and to allow for greater flexibility for inter-generational estate planning, which includes transferring the ownership of their respective shares of Farmco to Child 1 and Child 2 as described in Paragraph 10.

RULINGS

Provided that the preceding statements constitute complete and accurate disclosure of all the relevant Facts, Proposed Transactions, Additional Information and Purposes of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above, our rulings are as follows:

A. Subject to the application of subsection 69(11), provided that Child 1 is resident in Canada and each of the common shares and preferred shares of Farmco owned by Individual 1 is a "share of the capital stock of a family farm corporation" within the meaning of that term in subsection 70(10) immediately before the transfer described in Paragraph 10(i), the provisions of subsections 73(4) and (4.1) will apply such that:

(i) Individual 1 will be deemed to have disposed of such shares for PODs equal to the amount determined under subparagraph 73(4.1)(a)(i); and

(ii) Child 1 will be deemed to have acquired such shares from Individual 1 for an amount equal to Individual 1's deemed PODs determined in (i) above, pursuant to paragraph 74(4.1)(b).

B. Subject to the application of subsection 69(11), provided that Child 2 is resident in Canada and each of the common shares and preferred shares of Farmco owned by Individual 2 is a "share of the capital stock of a family farm corporation" within the meaning of that term in subsection 70(10) immediately before the transfer described in Paragraph 10(ii), the provisions of subsections 73(4) and (4.1) will apply such that:

(iii) Individual 2 will be deemed to have disposed of such shares for PODs equal to the amount determined under subparagraph 73(4.1)(a)(i); and

(iv) Child 2 will be deemed to have acquired such shares from Individual 2 for an amount equal to Individual 2's deemed PODs determined in (iii) above, pursuant to paragraph 74(4.1)(b).

C. Provided that each of the common shares and preferred shares of Farmco owned by Individual 1 or Individual 2, as the case may be, is "a share of the capital stock of a family farm corporation" within the meaning of that term in subsection 110.6(1) of the Act immediately before the respective transfers described in Paragraph 10, then such shares will be QFP for the purposes of subsection 110.6(2).

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

OTHER COMMENTS

1. Unless otherwise confirmed in the above rulings, nothing in this letter should be construed as implying that the CRA has confirmed, reviewed or has made any determination in respect of:

(i) the paid-up capital of any share, or the ACB or FMV of any property referred to herein; or

(ii) any other tax consequence relating to the facts, Proposed Transactions or any transaction or event taking place either prior to the Proposed Transactions or subsequent to the Proposed Transactions, whether described in this letter or not, other than those specifically described in the rulings given above, including whether any of the Proposed Transactions would also be included in a series of transactions or events that includes other transactions or events that are not described in this letter.

Notwithstanding rulings A, B and C, it is primarily a question of fact as to whether the Farmco shares described in Paragraph 10 would be Prescribed Shares; shares of the capital stock of a family farm corporation; or QFP. In addition, in order for Individual 1 or Individual 2, as the case may be, to be able to claim a CGD on the proposed disposition of their Farmco shares described in Paragraph 10, all of the other requirements as set out in section 110.6 of the Act must also be met at that time. Therefore, notwithstanding any factual representations that have been made by you and as described in this letter, the determination of these issues remains the sole responsibility of the CRA's Compliance Programs Branch, which would normally take place during the course of an audit or a review of the particular taxpayer's income tax return once such a return has been filed.

Yours truly,

XXXXXXXXXX
Business and Employment Income Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch