21 September 1989 Income Tax Severed Letter 5-8696 - Butterflies—offsetting liabilities against related property

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 September 13, 1989 requesting the Department's views regarding the circumstances in which a particular liability is considered to relate to a particular asset of a corporation in determining the net fair market value of each type of property for the purposes Of a "net" butterfly of the property of that corporation in the course of a reorganization that forms part of a series of transactions or, events to which subsection 55(2) of the Income Tax Act (the "Act") would, but for paragraph 55(3)(b) of the Act, apply.

Our comments set out below are offered in accordance with paragraph 24 of Information Circular 70-6R dated December 18, 1978 and may not be applicable in a particular situation. Such comments also are only in respect of liabilities, other than current liabilities, of a corporation. For these purposes, current liabilities of a corporation are not considered to relate to any particular asset of the corporation.

Generally, a particular liability may be considered to relate to a particular asset if the liability is specifically secured by that asset regardless of the direct use of the proceeds of the borrowing or of the' transaction or event giving rise to the particular liability. For example, a loan secured by a mortgage of real property would generally be considered to relate to that property regardless of the direct use of the proceeds of the loan. Where the particular liability is either unsecured or is secured by a general charge against all of the assets of the corporation, the liability may be considered to relate to a particular asset if that asset was acquired by the corporation either with the proceeds of the borrowing or as a result of the corporation incurring the particular liability, provided that the corporation continues to own the particular asset and such a relationship between the particular liability and the acquisition of the particular asset can reasonably be established. For example, a liability that arose as a result of an unsecured borrowing by the corporation the proceeds of which were used to acquire a particular asset or as a result of an assumption of debt by the corporation as part payment of the purchase price of a particular asset would generally be considered to relate to that particular asset. Where no particular asset was acquired by the corporation either with the proceeds of the borrowing or as a result of the corporation incurring a particular liability, the liability will generally not be considered to relate to any particular asset. For example, a liability that arose as a result of a borrowing by the corporation the proceeds of which were used to pay general expenses or a liability Incurred as a result of product warranties given by the corporation would generally not be considered to relate to any particular asset.