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: Confirmation that subsection 73(1) would apply to defer a capital gain upon the transfer of shares between a Taxpayer and Former Spouse as part of a negotiated matrimonial property settlement.
Position: Favourable ruling issued.
Reasons: Conditions met.
XXXXXXXXXX
2013-049380
XXXXXXXXXX, 2013
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling Request
XXXXXXXXXX (the Taxpayer)
We are replying to your correspondence of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-mentioned taxpayer.
We understand that, to the best of your knowledge, and that of the Taxpayer, none of the issues described herein is:
(a) in an earlier tax return of the Taxpayer or a related person;
(b) being considered by a Tax Services Office or Taxation Centre in connection with a previously filed tax return of the Taxpayer or a related person;
(c) under objection by the Taxpayer 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 expired; or
(e) the subject of a ruling previously issued.
DEFINITIONS
Unless otherwise specified, all statutory references herein are to the Income Tax Act (Canada) (the "Act"). In this letter, the following terms have the meaning specified:
"Act" means the Income Tax Act, R.S.C. 1985 (5th Suppl.) c.1, as amended to the date hereof;
"adjusted cost base" has the meaning assigned by section 54;
"Holdco" means XXXXXXXXXX;
"Proposed Transaction" means the transaction described in 9 below;
"Taxpayer" means XXXXXXXXXX;
"Former Spouse" means XXXXXXXXXX, the former spouse of the Taxpayer.
Our understanding of the facts and proposed transaction is as follows:
STATEMENT OF FACTS
1. The Taxpayer presently resides in XXXXXXXXXX, in the Province of XXXXXXXXXX. The Taxpayer's mailing address is XXXXXXXXXX. The Taxpayer's tax services office is XXXXXXXXXX and the Taxpayer's taxation centre is in XXXXXXXXXX.
2. The Taxpayer and the Former Spouse are living separate and apart by reason of a marital breakdown, and were divorced on XXXXXXXXXX.
3. The Taxpayer is currently the sole shareholder of Holdco. Shareholdings consist of XXXXXXXXXX Common Shares with an adjusted cost base of $XXXXXXXXXX and XXXXXXXXXX Class A Preference Shares with an adjusted cost base of $XXXXXXXXXX.
4. The shares of Holdco are capital property as defined in section 54, meaning that any gain or loss from the disposition of the shares would, if the shares were disposed of, be a capital gain or capital loss of the Taxpayer.
5. As part of a negotiated matrimonial property settlement agreement (dated XXXXXXXXXX), and subject to the receipt of a favourable advance income tax ruling from CRA concerning the Proposed Transactions, the Taxpayer and the Former Spouse have agreed that the Taxpayer will transfer all of the outstanding shares in Holdco to the Former Spouse.
6. Both the Taxpayer and the Former Spouse will be resident in Canada at the time of the proposed transaction.
7. The Taxpayer will not elect to not have the provisions of subsection 73(1) apply when the proposed transaction occurs.
8. For the taxation year ending XXXXXXXXXX, Holdco has investments in the form of loans receivable totaling $XXXXXXXXXX from XXXXXXXXXX corporations, XXXXXXXXXX of which are wholly-owned by the Former Spouse. There are no specific agreements or terms in place governing the repayments to Holdco of these loans.
PROPOSED TRANSACTION
9. The Taxpayer will transfer all of the outstanding shares of Holdco to the Former Spouse in settlement of rights arising out of their marriage.
PURPOSE OF THE PROPOSED TRANSACTION
10. The purpose of the proposed transaction is to transfer property on a tax-deferred basis from the Taxpayer to the Former Spouse pursuant to a negotiated property settlement of rights arising from their marriage.
11. After the shares are transferred, the Taxpayer will no longer be involved in making any future decisions regarding the repayment of the intercompany loans between Holdco and the XXXXXXXXXX corporations which are wholly-owned by the Former Spouse.
12. After the transfer of shares, the Former Spouse will be the sole shareholder of Holdco. As the intercompany loans described in paragraph 8 above are repaid to Holdco, Holdco will have cash available with which it may pay dividends to the Former Spouse.
RULINGS GIVEN
Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions, and the purposes of the proposed transactions, and that the proposed transactions are completed in the manner described above, our rulings are set forth below.
A. Subsection 73(1) will apply to the transfer referred to above. For greater certainty:
- The shares will be deemed to have been disposed of by the Taxpayer, at the time of the transfer, for proceeds equal to the adjusted cost base to the Taxpayer of the shares immediately before that time; and
- The shares will be deemed to have been acquired by the Former Spouse, at the time of the transfer, for an amount equal to the adjusted cost base to the Taxpayer of the shares immediately before that time.
B. Sections 74.1 and 74.2 will not apply to attribute any income or loss or any taxable capital gains or allowable capital losses relating to the transferred shares to the Taxpayer after the shares have been transferred. For greater certainty:
- After the share transfer as described in paragraph 9 above, any income or loss from the shares, or any property substituted therefor, will be the income or loss of the Former Spouse; and
- After the share transfer described in paragraph 9 above, any capital gain or allowable capital loss on the disposition of the shares, or any property substituted therefor, will be the capital gain or allowable capital loss of the Former Spouse.
The above rulings, which are based on the Act in its present form and do not take into account any proposed amendments thereto, are given subject to the general limitations and qualifications set forth in Information Circular 70-6R5, dated May 17, 2002, issued by the Canada Revenue Agency (the "CRA"), and is binding on the CRA provided the transfer is executed on or before XXXXXXXXXX.
Nothing in this letter should be construed as implying that the CRA has agreed to or accepted any other tax consequences relating to any facts or proposed transactions referred to herein other than those specifically described in the rulings, nor has the CRA agreed to, reviewed or made any determination in respect of the adjusted cost base or fair market value of any property referred to herein.
Yours truly,
XXXXXXXXXX
For Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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