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.
P. Mason (613) 957-4364
November 1st, 1988
Dear Sirs:
Re: XXXX
We are writing in response to your letter dated July 25, 1988, to the Winnipeg District Taxation Office. That letter was forwarded to us for response on September 30, 1988. In that letter, you asked about the tax consequences of the following course of action by the above named taxpayer.
The taxpayer owns an interest in a unitized oil well. The taxpayer's interest is assumed to have a value of XXXX for purposes of your query. The taxpayer proposes to transfer the interest in the unitized oil well at a nominal amount of XXXX to a corporation pursuant to an election under subsection 85(1) of the Income Tax Act (the "Act") for preferred shares of the corporation which are redeemable and retractable at XXXX each. It would appear that two such shares are to be issued to the taxpayer by the corporation on the transfer. The taxpayer would also inject XXXX or cash into the corporation. The common shares of the corporation would be owned by the taxpayer's XXXX, in equal amounts.
You requested the following rulings in respect of the proposed transactions:
1. Would any of the proposed transactions contravene any part of the Act?
2. Would the corporation be considered a small business corporation eligible for the small business deduction or as a specified investment business and, accordingly, ineligible for the small business deduction?
It is our position that any confirmation of the tax consequences of specific proposed transactions will only be provided in response to a request for an advance income tax ruling requested as set out in Information Circular 70-6R, a copy of which is enclosed herewith. We have, however, provided the following comments which are non-binding opinions and not rulings, as explained in paragraph 24 of Information Circular 70-6R.
It is our view that, pursuant to paragraph 85(1)(e.2) of the Act, irrespective of the amount actually agreed on by the taxpayer and the corporation, the amount that the taxpayer and the corporation will be deemed to have agreed to in their election would be XXXX for the interest in the unitized oil well. That is to say, subsection 85(1) of the Act would not provide a tax-free rollover on the transactions described above.
The income from an oil or gas well is business income. The ownership of an oil and gas well would not produce income from a specified investment business; and, assuming the limits on such income are not exceeded, will produce income eligible for the small business deduction.
We trust you will find the foregoing useful.
Yours truly,
Director Bilingual Services and Resource Industries Division Rulings Directorate
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© Her Majesty the Queen in Right of Canada, 1988
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© Sa Majesté la Reine du Chef du Canada, 1988
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