22 December 1989 Income Tax Severed Letter 5-8642B

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:

This is in reply to your letter of August 24, 1989 in which you requested our opinion regarding issues that have arisen in connection with a transaction which involves a non-arm's length inter-corporate transfer of property, subject to a subsection 85(1) election, followed by an arm's length sale of the transferred property by the corporate transferee which has available non-capital losses.

Our Comments

You have raised certain queries relating to a specific proposed transaction. As expressed at paragraph 23 of Information Circular 70-6R dated December 18. 1978, the Department will not express written opinions as to the tax consequences of specific proposed transactions other than by way of an advance income tax ruling. The procedures for requesting an advance income tax ruling are set out in Information Circular 70-6R.

Although we are unable to provide any binding assurance here with respect to the queries you have raised, we have set out below our general comments on some of these issues.

Several of the provisions of subsection 85(1) of the Act (eg. paragraphs 85(1)(c) and (c.1)) require a determination of the fair market value of the transferred property in respect of which an election is made. In response to Question 53 at the 1981 Revenue Canada Round Table, we expressed our view as to the appropriate interpretation of the references in section 85 to fair market value, as follows:

• "The value of property relates to the attributes of the property and is unaffected by the tax position of the owner"

In other words, we stated our view that deferred taxes in respect of a property transferred pursuant to a subsection 85(1) election would not be relevant in the valuation of the transferred property, for purposes of the references to the fair market value of the transferred property in subsection 85(1).

We acknowledge that representatives of the Department may have, on occasion, expressed their opinions that this approach would be varied in certain situations. As explained in paragraph 24 of Information Circular 70-6R, such opinions are not binding on the Department. Our current position is consistent with the position outlined at the 1981 Revenue Canada Round Table. In particular, it should be noted that we do not believe any variation of the 1981. approach is appropriate in the situation where the subsection 85(1) transfer is immediately followed by a sale to an ad's length third party.

You have suggested that, if the potential tax liability of a transferor in the case of a subsection 85(1) transfer is not taken into account in valuing the transferred property, the non-share consideration could include the assumption of the deferred tax liability as an assumption of debt. We do not agree. The potential tax liability of the transferor in such a case is never realized or enforceable against the transferor. Unless a potential liability is realized, there is no liability to be assumed. We refer you to our response to Question 32 of the 1986 Revenue Canada Round Table in which, in the context of an intercorporate transfer of depreciable property, we stated that the deferred or potential tax liability does not affect the consideration for the transferred assets.

Situations may arise where common shares are issued as consideration for a non-arm's length transfer of property pursuant to subsection 85(1), and the fair market Value of the transferred property is greater than the fair market value of the common shares because of the deferred taxes relating to the transferred property which in the circumstances may be taken into account in valuing the common shares for purposes of the application of paragraph 85(1)(e.2). In these situations the Department would not ordinarily regard the excess as a benefit that the transferor desired to have conferred on the transferee and, accordingly, paragraph 85(1)(e.2) would not ordinarily be applicable to these situations.

The foregoing expression of opinion is provided in accordance with the practice referred to in paragraph 24 of Information Circular 70-6R.