16 September 1987 Income Tax Severed Letter 5-3479 - [Request for a technical interpretation concerning subsection 88(1) of the Income Tax Act (the "Act")]

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.

Revenue Canada Taxation

Head Office

XXXX

87/2604

A.A. Cameron (613) 957-2121

September 16, 1987

Dear Sirs:

Re: Request for a technical interpretation concerning subsection 88(1) of the Income Tax Act (the "Act")

We are writing in response to your letter of June 5, 1987 in which you requested our views on the application of certain provisions contained in the above-noted subsection of the Act to a specific fact situation outlined in that letter.

Since the fact situation detailed in your letter involved identifiable taxpayers and their proposed transactions we are unable to comment thereon in the context of a technical interpretation. That type of situation can only be addressed on the basis of an advance income tax ruling request.

We will however attempt to address the application of certain provisions of subsection 88(1) of the Act to the following hypothetical fact situation:

- a corporation ("P Co.") enters into an agreement to purchase (the "Agreement" from another corporation ("V Co.") all the issued shares in the capital stock of a wholly owned subsidiary ("T Co.") of V Co.

- P Co., V Co. and T Co. are all taxable Canadian corporations as defined for the purposes of the Act.

- P Co. and V Co. are not related to each other, and deal with each other at arm's length, for the purpose of the Act.

- the assets of T Co. consist of those contained in its various operating divisions, as well as, the shares in the capital stock of its various subsidiary companies; the cost amounts of the T Co. assets are substantially less than their fair market values.

- the Agreement provides that immediately before the closing of this share acquisition T Co. will transfer (pursuant to valid elections under the provisions of subsection 85(1) of the Act) the assets contained within its various operating divisions to newly incorporated wholly owned subsidiary companies of T Co. ("Newcos") for consideration having an aggregate fair market value at the time of such transfers equal to the aggregate fair market value, at that time, of the assets so transferred.

- after the share purchase detailed in the Agreement is completed P Co. will pass a shareholder resolution authorizing the winding-up of T Co.

- P Co. will partially fund the acquisition of the T Co. shares through loans from arm's length financial institutions on normal commercial terms and conditions.

In our opinion the provisions of subsection 88(1) of the Act will apply to the winding-up of T Co. with paragraph 88(1)(c) determining P Co.'s cost of each property of T Co. distributed to P Co. on the winding-up. Whether or not an amount may be determined under paragraph 88(1)(d) of the Act and added to the cost of the shares of the Newcos to P Co. will depend upon the satisfaction of a number of requirements including that the shares were "... owned by (T Co.) at the time (P Co.) last acquired control of (T Co.) and (were owned) thereafter without interruption until such time as (they were) distributed to (P Co.) on the winding-up ..." of T Co. In our view the determination of the time that P Co. last acquired control of T Co. for the purposes of paragraph 88(1)(d) of the Act, as well as whether control has been acquired for the purposes of proposed subsection 249(4) or as detailed in proposed subsection 256(8) of the Act, will involve a number of questions of fact which can only be resolved upon a complete review of all the background facts and circumstances. It would appear that, due to the nature of the determinations required and the issues involved, this type of situation would have to be handled on a case by case basis and that therefore we are unable to provide meaningful general comments thereon.

It is our view that Interpretation Bulletin IT-315 was not affected by the decision of the Supreme Court of Canada in the Bronfman Trust case and that the comments contained in that Interpretation Bulletin concerning interest deductibility remain in effect.

We hope our comments are of assistance to you.

Yours truly,

for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch