12 June 1992 Income Tax Severed Letter 9216355 - GAAR

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

SUBJECT: GAAR SECTION: 245(2)]

1992 CPTS ROUNDTABLE

QUESTION

• 2. Corporation A carrying on the businesses of mining and operating oil and gas properties, wishes to dispose of the mining business through a share transaction rather than an asset sale. The value of the mining assets is approximately equal to the value of the oil and gas assets. Corporation A has substantial earned depletion and mining earned depletion bases which have no economic value to the purchaser. Due to legal and business constraints of Corporation A, the desired disposition will be achieved by selling the shares of Corporation A.
• Corporation A transfers the mining assets to a new wholly-owned subsidiary (Newsub) subject to a joint election under the provisions of subsection 85(1) of the Act. Corporation A transfers the oil and gas assets and business to a sister corporation in a butterfly transaction and elects to have the successor rules apply. The desired disposition is achieved by selling the shares of Corporation A which owns the shares of Newsub or by first winding-up Newsub and then selling the shares of Corporation A.

Would subsection 245(2) (GAAR) apply?

ANSWER

• 2. The determination of whether a particular transaction is an avoidance transaction can only be made after a complete examination of all the relevant facts and circumstances. As stated in Information Circular 88-2 and illustrated in the examples provided in the Circular, Revenue Canada will look at the transaction or series of transactions to see if there is misuse or abuse of the provisions of the Act or if the tax consequences of the transaction or series are so inconsistent with the general scheme of the Act that they cannot have been within the contemplation of Parliament.
• There is not enough information in the question to enable us to express a view as to whether GAAR applies. For example, it would be helpful to have information about the business and legal constraints which cause the sale of the mining assets to be by way of a sale of the shares of Corporation A; why the sale of Newsub would not accomplish the desired disposition; and whether the sale of the shares of Corporation A will be to a related or unrelated party.
• If the above transactions are proposed and are not the subject of an ongoing audit, a request for an advance income tax ruling on the matter, together with applicable documentation, and your views as to the tax results, may be submitted to Revenue Canada, Taxation, 88 Metcalfe Street, Resource Industries Section, Rulings Directorate, Ottawa, Ontario, K1A 0L8.

Prepared by: Bruce Rankin

ISSUE SHEET

1991 CPTS Roundtable Bruce Rankin
Question 2 5-921635
June 12, 1992

This question was submitted by XXX,XXX

In 1989 the Resource Industries Section referred a similar scenario to the GAAR Committee. The Committee decided that GAAR would apply to the proposed transaction where unused resource pool balances were transferred to an arms-length successor after the completion of a preliminary step to remove mining assets from the vendor so that the 66.7 "all or substantially all" requirement was met. In the 1989 referral the Committee noted that the successored resource pools were attributed primarily to the mining activity which was not the subject of the successor corporation election.

The facts presented with this question are similar to the facts in the 1989 GAAR issue. In that situation, GAAR was said to apply.

In order to arrive at a conclusion as to whether or not GAAR applies to a situation, it is imperative that we have all the relevant information. We do not have sufficient information in the brief description of the given hypothetical situation. We would want to know the information about the "business and legal constraints" that necessitate a disposition of the shares of Corporation A. We would also want to know why the sale of Newsub would not suffice in order to achieve the desired disposition of the mining business by a share sale.

Assuming that the shares of Corporation A are to be sold without the resource pools, it becomes apparent that the transfer of the mining business into Newsub is the means by which Corporation A can avail itself of the successor election in order to transfer the resource pools to the sister corporation. This is necessary in order to meet the requirement that "all or substantially all" of the assets of Corporation A be transferred in order for the successor rules in section 66.7 to apply. In this case GAAR would apply as described in the 1989 scenario above and as described in the Situation B in question 25 of the 1988 CPTS Roundtable.

See also question 32 of the 1990 CPTS Roundtable which acknowledges that GAAR would apply to certain ephemeral in-house transfers of property designed to make a successor election technically available, and might apply to in-house transfers designed for such purposes where the transfer is not temporary.

John Chan discussed the question and answer with Mr. John Bentley at his office on June 10, 1992 and he does not have any concerns about the question and answer.

A copy of the question and answer together with the issue sheet was sent by fax to Simon Thompson, Dept. of Finance on June 9, 1992 and John Chan spoke to Mr Thompson on June 10. Mr. Thompson said that Finance does not have any concerns about the question and answer.

The question and answer was reviewed by John Kurrant, Oil & Gas Specialist on June 12 and he said that he does not have any concerns.