21 September 1989 Ruling 32483A F - Section 55(2)

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.

Subject:  19(1)  24(1)

We are enclosing for your information a copy of a letter request for certain advance income tax rulings made on behalf of the above-captioned taxpayers.  As well, we enclose copies of letter submissions made on behalf of the said taxpayers by their representatives.

The taxpayers have withdrawn their request.

It is our opinion that the proposed transaction would be subject to the application of subsection 55(2) of the Income Tax Act (Canada) (the Act) and that neither of the paragraph 55(3)(a) and (b) would apply to preclude that application.

Specifically, it is our position that:

(i)     subsection 55(2) would be applicable by virtue of paragraph 55(2)(c) in that the said paragraph is applicable where there is not a disposition of shares;

(ii)     the two groups of taxpayers deal at arm's length, with the result in events of the type described in subparagraphs 55(3)(a)(i) and (ii); and;

(iii)     the proposed transactions do not qualify for the excepting treatment of paragraph 55(3)(b) in that

(A)       in contemplation of the proposed "butterfly" transaction, property of Builders Co. a predecessor of the particular corporation, 24(1) otherwise than by means of a transaction of the types described in subparagraphs 55(3)(b)(iii) to (viii);

(B)       there will not be a pro rata division of property in that the shares of Loanco will not be distributed to the shareholders of 24(1) in the course of the butterfly; and

(C)       while the taxpayers proposed to utilize the "net equity" method of determine the fair market value of 24(1) property for the purposes of paragraph 55(3)(b), they do not take into account 24(1) Debt; and

(iv)     the provisions of subsection 245(2) could apply to the series of transactions whereby the 24(1) Debt is transferred to Loanco with Loanco then t be wound up at a later date, in that that series of transactions would arguably abuse the provisions of subsections 80(2) of the Act.

DirectorReorganizations and Non-Resident DivisionSpecialty Rulings DirectorateLegislative and IntergovernmentalAffairs Branch