18 September 1989 Income Tax Severed Letter 5-8127 - Partition and licitation of property owned in indivision under the Civil Code of Quebec

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.

Dear Sirs:

We are writing in response to your letter of May 17, 1989 in which you requested the Department's opinion regarding the application of paragraphs 13(21)(c) and 54(c) and subsections 13(4) and 44(1) of the Income Tax Act (the “Act”) to a partition and licitation of property owned in indivision under the Civil Code of the Province of Quebec (the “Civil Code”) and the Code of Civil Procedure of the Province of Quebec (the “Code of Civil Procedure”).

The Department's position, as expressed in its response to Question 54 at the Revenue Canada Round Table at the 33rd Conference of the Canadian Tax Foundation held in 1981, with respect to advance income tax rulings regarding a partition of property under the Civil Code, has recently been reconsidered. The Department is now prepared to issue advance income tax rulings with respect to such proposed transactions. Because your letter relates to issues arising in respect of transactions actually being contemplated, the questions you have asked should be raised in the context of an advance income tax ruling application made in accordance with the guidelines set out in Information Circular 70-6F dated December 18, 1978. Nevertheless, we are prepared to provide you with the following general comments and opinions in response to your subsections and to the views you express in your letter.

In the situation that you describe, members of two families (such families referred to as Family 1 and Family 2, respectively, in this letter) own property in indivision (the “Property”). The Property is comprised of several parcels of real estate (that is, parcels of land and the apartment buildings thereon) that are situated in the Province of Quebec. For various reasons, Family 1 and Family 2 want to sever their interests in the Property but neither family is willing to purchase the interests of the other family in the Property. Family 1 does not want to sell its interest in any part of the Property to Family 2 because Family 1 does not want to realize, prematurely, any gains for the purposes of the Act.

We understand that, in these circumstances, the provisions of the Civil Code and the Code of Civil Procedure would apply as follows:

• (i) Pursuant to Article 689 of the Civil Code, the two families may not be compelled to remain in undivided ownership of the Property.
• (ii) If the families can agree upon a partition in kind of the Property, the Property may be divided by a partition in kind thereof so that the fair market value of the part thereof that is so allotted, separately and exclusively, to each family approximates, as nearly as is possible in the circumstances, each family's proportionate share of the fair market value of the Property; any shortfall, relative to a family's proportionate share of the fair market value of the Property, in the fair market value of the part of the Property so allotted to that family would be compensated for by a payment to that family by the other family.
• (iii) If the families cannot agree upon such a partition of the Property, either party may demand, in an action before a Court pursuant to Article 808 of the Code of Civil Procedure, a partition of the Property.
• (iv) Pursuant to Article 698 of the Civil Code and Article 809 of the Code of Civil Procedure, the Court may order partition in kind of the Property if that can be conveniently or advantageously done and upon such partition, the Court may allot part of the Property to one family and allot another part to the other family so that the fair market-value of the part of the Property that is so allotted, separately and exclusively, to each family approximates without exceeding, as nearly as is possible in the circumstances, each family's proportionate share of the fair market value of the Property; any part of the Property that is not so allotted to either family must be sold by licitation, that is, by auction, and the proceeds thereof allotted to each family so that the aggregate of the amount so allotted and the fair market value of the part of the Property so allotted to a family equals that family's proportionate share of the fair market value of the Property.
• (v) If the Court decides that such a partition in kind of the Property cannot be conveniently or advantageously done, all of the Property must be sold by licitation.
• (vi) Both families may participate in any such licitation of the Property or part thereof but strangers, that is, persons other than members of either family, cannot be excluded from participating in such licitation.
• (vii) Pursuant to Article 747 of the Civil Code, if one of the families acquires all or any part of the Property pursuant to such a licitation, such acquisition of the Property or part thereof is of the nature of, and has the effects of, the Property or part thereof being allotted to that family on a partition in kind of the Property but, if one of the strangers buys all or any part of the Property pursuant to such licitation, such acquisition of the Property or part thereof is a sale thereof to the stranger.

You have asked whether or not, in the situation you describe, the partition of the Property under the Civil Code, either by agreement between Family 1 and Family 2 or pursuant to a court order sought by Family 2 in an action for a partition of the Property, would be a disposition of property by Family 1 and by Family 2 for the purposes of paragraphs 13(21)(c) and 54(c) of the Act. You note that, pursuant to Article 746 of the Civil Code, among other Articles, the effect of such a partition of the Property would be purely declaratory and would not transfer ownership of any part of the Property to the family to whom that part is allotted on such partition. Hence, it is your view that, there being no transfer of ownership of the part of the Property so allotted to a family by the other family on the partition of the Property, the other family should not be considered to have disposed of that part of the Property for the purposes of paragraphs 13(21)(c) and 54(c) of the Act as a result of such a partition of the Property.

Subject to the two limitations described more fully below and provided that, in the situation you describe, there is no shortfall in the fair market value of the part of the Property allotted to either family on the partition of the Property and neither family receives any proceeds from the licitation of the Property or any part thereof, we agree with your conclusion that neither family will have disposed of property for the purposes of paragraphs 13(21)(c) and 54(c) of the Act as a result of such a partition of the Property. Nevertheless, we do not agree with your reasons for reaching this conclusion. It is the Department's opinion that, notwithstanding that there is no transfer of ownership to a person of any property allotted to that person on a partition of property owned by that person in indivision, there may, depending upon the circumstances, be a disposition of property for the purposes of paragraphs 13(21)(c) and 54(c) of the Act by the other persons who, immediately before such partition, owned the property in indivision.

Pursuant to Article 746 of the Civil Code, any property allotted to, or acquired by, a person in a partition or licitation of property that was owned in indivision by the person is presumed always to have been owned by the person and any other property allotted to, or sold to, any other person on such partition or licitation is presumed never to have been owned by the person. Consequently, it is the Department's opinion that any property so allotted to, or acquired by, a person on a partition or licitation of property that was owned by that person in indivision could not be said to have been received by that person at the time of such partition or licitation and, hence, could not be said to have been received by that person as proceeds of disposition of any other property allotted to, or sold to, any other person on such partition or licitation. But, it is the Department's opinion that any other amount received by such a person upon the partition or licitation of property as compensation for any shortfall in the fair market value of the property so allotted to that person on such partition of property or as that person's share of the purchase price paid by any person who purchases any property on such licitation of property would be proceeds of disposition received by that person for the purposes of paragraphs 13(21)(d) and 54(h) of the Act on such partition or licitation. Hence, it is the Department's opinion that, where such a person has so received proceeds of disposition, there has been a disposition of property, pursuant to subparagraph 13(21)(c)(i) and paragraph 54(c)(i) of the Act, by that person on such partition or licitation of property.

As noted earlier, our opinions expressed above are subject to two additional limitations. First, our opinions expressed above only apply provided that, for the purposes of an action in partition under the Civil Code brought by one family, the Property is one mass, that is, the Property is not comprised of more than one mass, each of which could be the object of a partition, separately from the other such masses and without the consent or acquiescence of the other family to the exclusion of the other masses from the object of such partition. Whether or not, for the purposes of the Civil Code, the Property is one mass is a question of law that can only be determined by reference to, among other things, all of the relevant facts and circumstances of the particular situation. Where, pursuant to one action under the Civil Code, two or more masses are partitioned, it is the Department's opinion that such partitions will, for the purposes of the Act, give rise to a disposition of property by a person to the extent that the person is allotted property from one such mass in lieu of any part of his proportionate share of any other such mass.

Second, our opinions expressed above only apply provided that, for the purposes of the Act, no property that forms part of the one mass that is the Property was acquired in contemplation of the partition of the Property. Whether or not, for the purposes of the Act, any property that forms part of the Property was acquired in contemplation of a partition of the Property is a question of fact that can only be determined by reference to all of the relevant facts and circumstances of the particular situation. It is the Department's opinion that an acquisition of property in indivision, when made in contemplation of a partition of property that includes any property so acquired, is, in substance, the payment of compensation by one person to another person in respect of a shortfall in the fair market value of property that would, but for such acquisition, be allotted to the other person on such partition but without such compensation being proceeds of disposition received by that other person for the purposes of the Act. Where such an acquisition of property results in a tax benefit, within the meaning of subsection 245(1) of the Act, it is the Department's opinion that, unless such acquisition may reasonably be considered to have been made primarily for bona fide purposes other than to obtain the tax benefit, such acquisition would be an avoidance transaction, within the meaning of subsection 245(3) of the Act. Where such an acquisition of property is an avoidance transaction, it is the Department's opinion that such acquisition would generally be considered to result in an abuse having regard to the provisions of the Act read as a whole and, hence, that subsection 245(2) of the Act would apply to deny any tax benefit that results, directly or indirectly, from the series of transactions that includes such acquisition of property.

You have also asked whether or not Family 1 will be eligible to make the elections described in subsections 13(4) and 44(1) of the Act if, in the situation you describe, Family 1 is considered to have received proceeds of disposition as a result of the Property or any part thereof being allotted to, or acquired by, Family 2 or being sold to a stranger as a result of an action for the partition of the Property brought by Family 2 under the Civil Code, provided, of course, that Family 1 thereafter acquires property as replacement property, within the meaning of subsections 13(4.1) and 44(5), respectively, of the Act, for its former interest in the Property or such part thereof, as the case may be. It is your view that Family 1 should be so eligible to make such elections because any such proceeds of disposition received by Family 1 should, where Family 1 is forced to make such a disposition as a result of an action for the partition of the Property brought by Family 2, be considered to be compensation received by Family 1 for property of Family 1 taken from Family 1 under statutory authority and, hence, to be proceeds of disposition described in subparagraphs 13(21)(d)(iv) and 54(h)(iv) of the Act.

We do not agree with your view expressed above. It is the Department's opinion that, for the purposes of subparagraphs 13(21)(d)(iv) and 54(h) (iv) of the Act, a person's property can only be said to have been taken under statutory authority by another person for compensation if the other person became obliged to pay compensation to the person as a result of the other person so taking the person's property but not if the other person's statutory authority to “take” the property arose as a result of that other person agreeing to pay an amount to the person.

Generally, in the former case, the other person would have had the statutory authority to take the property without reaching any agreement as to compensation with, or outbidding, anyone including, especially, the owner of the property in order to take the property and the person whose property was taken would not have been entitled to prevent the taking thereof by disputing the amount of the compensation to be paid to him but would only have had a right to have the amount of the compensation properly determined by a court or other competent tribunal whereas, in the latter case, the person whose property is said to have been “taken” would have been entitled to prevent the “taking” thereof by the other person by disputing or not agreeing to the compensation being offered by the other person. It is also the Department's opinion that an amount is only received as compensation for property taken, for the purposes of subparagraphs 13(21)(d)(iv) and 54(h)(iv) of the Act, where the amount is received, as in the former case, as a remedy or redress for the loss of the property and not, as in the latter case, as the proceeds of the sale, albeit a forced sale, of the property. Hence, it is the Department's opinion that, in the situation you describe, any proceeds of disposition received by Family 1 would not be compensation for property taken under statutory authority for the purposes of subparagraphs 13(21)(d)(iv) and 54(h)(iv) of the Act because Family 1 would be entitled, if it felt that the bid made by any person for any property was inadequate, to prevent the disposition of that property to that person by itself making a higher bid for that property and because any person who acquires any property in a licitation does so not pursuant to the exercise of any statutory authority conferred upon that person but because that person has made the highest bid for the property. That Family 1 may be unable, by reason of its impecuniosity, to make a higher bid to so prevent the “taking” of any of its property is not, in our opinion, relevant.

Our opinions expressed in this letter are based upon the Act without taking into account any future amendments, whether currently proposed or not. The facts of a particular situation may lead to a different conclusion. Such opinions are not rulings and, in accordance with the guidelines set out in Information Circular 70-6R, are not binding on the Department.