2014 Ruling 2014-0523551R3 - Disposition of a Former Business Property

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 a voluntary disposition of a particular property will meet the definition of a "former business property" in subsection 248(1) of the Act?

Position: Yes.

Reasons: Based on particular facts the property meets definition in subsection 248(1) of the Act.

XXXXXXXXXX
2014-052355

XXXXXXXXXX, 2014

Dear XXXXXXXXXX:

Re: Request for Advance Income Tax Ruling, XXXXXXXXXX

We are writing in response to your letter of XXXXXXXXXX and to our subsequent telephone conversations of XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above-referenced taxpayer.

To the best of your knowledge and that of the above-referenced taxpayer, none of the issues involved in this ruling is:

i) dealt with in an earlier return of any of the above-referenced taxpayer, or a related person,

ii) being considered by a Tax Services Office or Taxation Centre in connection with a previously filed tax return of the above-referenced taxpayer or a related person,

iii) under objection or appeal by the above-referenced taxpayers, or a related person,

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

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

Further, the above-referenced taxpayer has advised that the transactions described herein will not result in the above-referenced taxpayer or any related person described herein being unable to pay its existing outstanding tax liabilities.

DEFINITIONS

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 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 (the "Act"), and the Income Tax Regulations thereunder are referred to as the "Regulations". In this letter the following terms have the meanings specified:

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

b) "capital property" has the meaning assigned by section 54;

c) "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 and contracting for a taxable purchase and sale, expressed in terms of cash;

d) "former business property" has the meaning assigned by subsection 248(1);

e) "Holdco" means XXXXXXXXXX;

f) "Opco" means XXXXXXXXXX;

g) "Parent" means XXXXXXXXXX who is the father of Sibling 1, Sibling 2 and Sibling 3;

h) "Properties" means the properties described in subparagraphs 2(a) and 2(b) of this letter;

i) "Proposed Transactions" means the transactions described in paragraphs 8 to 10 of this letter;

j) "related persons" has the meaning assigned by subsection 251(2);

k) "replacement property" has the meaning assigned by subsections 13(4.1), and 44(5);

l) "Sibling 1" means XXXXXXXXXX;

m) "Sibling 2" means XXXXXXXXXX;

n) "Sibling 3" means XXXXXXXXXX; and

o) "taxable Canadian corporation" has the meaning assigned by subsection 89(1).

FACTS

1. Holdco is a taxable Canadian corporation that is located at XXXXXXXXXX. Holdco files its tax returns with the XXXXXXXXXX Tax Centre and it deals with the XXXXXXXXXX Tax Services Office. The shareholders of Holdco are as follows:

Sibling 1 – XXXXXXXXXX Class "A" voting common shares
Sibling 2 – XXXXXXXXXX Class "A" voting common shares
Sibling 3 – XXXXXXXXXX Class "A" voting common shares
Parent – XXXXXXXXXX Class "E" voting preferred shares

Holdco is controlled by Parent.

2. Holdco owns several properties described as follows:

a) XXXXXXXXXX.

b) XXXXXXXXXX.

c) XXXXXXXXXX. These XXXXXXXXXX properties are currently rented to arm's-length third parties. The FMV of these XXXXXXXXXX properties is less than XXXXXXXXXX% of the FMV of all the properties that are owned by Holdco.

Each of the above-described properties is held by Holdco as capital property.

3. The Properties, which are located XXXXXXXXXX, are currently zoned for heavy industrial use. The Properties are the only remaining properties in that area that are zoned for such use as the other surrounding properties (except for the commercial use of properties located XXXXXXXXXX) have mostly all been developed or are in the process of being developed, for multi-residential use (i.e., high rise condominiums). Holdco currently rents the Properties to Opco.

4. Opco is a taxable Canadian corporation that is located at XXXXXXXXXX. Opco files its tax returns with the XXXXXXXXXX Tax Centre and it deals with the XXXXXXXXXX Tax Services Office. The shareholders of Opco are:

Sibling 1 – XXXXXXXXXX Class "A" common
Sibling 2 – XXXXXXXXXX Class "A" common

Opco is controlled by Sibling 1.

5. Holdco and Opco are related persons by virtue of paragraph 251(2)(c).

6. Opco operates XXXXXXXXXX business in XXXXXXXXXX. The Properties that Opco rents from Holdco are being used by Opco primarily for the purpose of gaining or producing income from its XXXXXXXXXX business.

7. Opco's XXXXXXXXXX business is XXXXXXXXXX which result in complaints from residential neighbors. As well, traffic and the parking for the business use of the Properties are becoming congested, XXXXXXXXXX.

PROPOSED TRANSACTIONS

8. Holdco proposes to sell the Properties to an arm's-length person for their FMV.

9. Holdco proposes to purchase a new property, which will include land, building and a parking lot, to replace the Properties. Holdco will rent the new property to Opco and Opco will use the new property for the same business use as the Properties that are currently used by Opco. It is intended that the new property will be acquired by Holdco within the required time limit described in paragraph 44(d) and clause 13(4)(c)(ii)(B).

10. Holdco will make the required election under subsections 44(1) and 13(4) of the Act in its return of income for the taxation year in which it acquires the new property as a replacement property.

PURPOSE OF THE PROPOSED TRANSACTIONS

11. The purpose of the proposed transactions for Holdco is to allow Opco to relocate its XXXXXXXXXX business to a more suitable location.

RULING GIVEN

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purposes of the proposed transactions, and provided further that the proposed transactions are completed in the manner described above, we rule as follows:

The disposition of the Properties by Holdco as described in paragraph 8 of this letter will be considered to be a disposition of property that is former business property.

The above advance income tax ruling, which is based on the Act and the Regulations in their present form and does not take into account any proposed amendments thereto, is given subject to the general limitations and qualifications set out in Information Circular 70-6R5 Advance Income Tax Rulings, dated May 17, 2002, and is binding on the CRA provided that the proposed transaction described in paragraph 8 of this letter is completed prior to XXXXXXXXXX.

Nothing in this ruling letter should be construed as implying that the CRA has agreed to, reviewed or has made any determination in respect of any tax consequences relating to the Facts, Proposed Transactions described herein other than that specifically described in the ruling given above, including whether the new property to be acquired by Holdco as referred to in paragraph 9 of this letter will be a replacement property.

Yours truly,

XXXXXXXXXX
Manager
Business Income and Capital Transaction Section
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch