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: Does the assumption by an acquiring foreign affiliate of liabilities of a disposing foreign affiliate constitute "consideration received" by the disposing affiliate for purposes of paragraph 5907(2.01) of the Regulations?
April 22, 2015
RE: Subsection 5907(2.01) of the Income Tax Regulations
This is in response to your e-mail of October 2, 2014, wherein you asked for our views regarding the operation of the above provision of the Income Tax Regulations (the "Regulations"). Specifically, you request our view whether the term "consideration received" as it is used in paragraph 5907(2.01)(a) of the Regulations is considered to include any liabilities that are assumed by a foreign affiliate of a taxpayer on a transfer of property to it by another foreign affiliate of the taxpayer.
This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R6, Advance Income Tax Rulings and Technical Interpretations however, we offer the following general comments, which may be of assistance to you.
Subsection 5907(2.01) of the Regulations reads in part as follows:
"Subparagraphs (2)(f)(ii) and (j)(iii) and subsection (5.1) do not apply to a particular disposition of property (referred to in this subsection as the "affiliate property") by a particular foreign affiliate of a taxpayer if
(a) the only consideration received in respect of the particular disposition is shares of the capital stock of another foreign affiliate of the taxpayer;"
We are of the view that if a foreign affiliate (the "Disposing FA") of a taxpayer transfers assets to another foreign affiliate (the "Receiving FA") of the taxpayer, and as part of this transfer the Receiving FA assumes liabilities of the Disposing FA, the assumption of those liabilities by the Receiving FA would constitute "consideration received" by the Disposing FA for purposes of paragraph 5907(2.01)(a) of the Regulations.
Although there is no definition of "consideration received" in the Income Tax Act (the "Act"), it is commonly understood that "consideration received" by a taxpayer in respect of a particular disposition of assets includes the amount of any liabilities of the taxpayer that are assumed by a purchaser as part of the purchase of the disposed assets. It is noteworthy as well that in Daishowa-Marubeni International Ltd. v The Queen (2013 SCC 29), the Court stated
"It is beyond dispute that, as a matter of principle, the assumption of a vendor's liability by a purchaser may constitute part of the sale price and therefore part of the vendor's proceeds of disposition; see, e.g., Telus Communications (Edmonton) Inc. v. Minister of National Revenue, 2009 FCA 49, 386 N.R. 354, at para. 28; Loyens v. The Queen, 2003 TCC 214, 2003 DTC 355 (General Procedure), at paras. 31 and 33. A straightforward example of such a circumstance would be the purchase of a property that is encumbered by a mortgage. If, for instance, an individual purchases a building by paying some cash and also assumes the mortgage encumbering the property, the sale price of the property includes the amount of the cash received and the amount remaining on the mortgage assumed; see Loyens, at paras. 31 and 33. The vendor's proceeds of disposition for tax purposes would thus include both amounts; see Lord Elgin Hotel Ltd. v. Minister of National Revenue (1964), 64 DTC 637 (Tax Appeal Board), at paras. 11-12."
In summary, it is our view that the assumption by the Receiving FA of liabilities of the Disposing FA on a transfer of property to it, is "consideration received" by the Disposing FA for the property transferred for purposes of paragraph 5907(2.01)(a) of the Regulations. Accordingly, any such transfer of property by a Disposing FA would not meet the test in paragraph 5907(2.01)(a) of the Regulations.
We trust our comments are of assistance.
Olli Laurikainen, CPA CA
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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