29 June 1994 Income Tax Severed Letter 9337725 - Corporate status of a Czech limited liability corporation (HAA 4093-CZECH)

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.

PRINCIPAL ISSUES:

Whether a Czech limited liability company would be a corporation for purposes of the Act.

POSITION TAKEN:

The Department could not make a determination with the information provided.

REASONS FOR POSITION TAKEN:

It will be necessary to review the comapny agreement with respect to each Czech LLC before a determination of corporate status can be made.

933772
XXXXXXXXXX Jim Wilson

Attention: XXXXXXXXXX

June 29, 1994

Dear Sirs:

Re: Czech and Slovak Republics Limited Liability Company

This is in reply to your letter dated December 23, 1993, in which you asked whether the Department would treat a limited liability company formed under Sub-Article 1 of Article IV of the laws of the Czech and Slovak Republics ("foreign statute") as a corporation for purposes of the Income Tax Act ("Act"). These companies are referred to as "Spolecnost s eucemin Omezenyw" or "S.R.O." in both Republics. You have enclosed an unofficial english translation of the foreign statute. We cannot provide an opinion as to the corporate status of an S.R.O. without reviewing the company agreement with respect to the particular S.R.O. We are concerned that participants in some S.R.O.s may not in fact possess limited liability (see paragraph 2 of Interpretation Bulletin IT-343R). Subparagraph 121(1) of the foreign statute reads as follows:

• "The company agreement may stipulate that the general meeting is entitled to impose on participants obligations to contribute to a repayment of the company's losses by financial settlement over and above the amount of deposit up to a half of the equity, according to the amount of his deposits. Failure to fulfil this obligation is governed by regulations of Par. 113 sec. 2 to 4."

Paragraph 106 of the foreign statute reads as follows:

• "A limited liability company is responsible for a breach of its commitments with all its assets. A participant is responsible for the liabilities of the company to the extent of his unpaid deposit registered in the Commercial Register. Settlement on behalf of the company for reasons of liability is calculated in the repayment of the deposit, or a participant may claim compensation from the company. If he cannot obtain such compensation he may request compensation from each of the remaining participants to the extent of his participation in the company's equity."

It is not clear from paragraph 106 of the foreign statute whether a third party could sue or would have direct legal action against the participant of an S.R.O. for liabilities of the S.R.O. The foreign statute provides very few details pertaining to the S.R.O.'s capabilities of obtaining rights and assuming liabilities or whether the rights acquired or liabilities assumed by it are not also the rights or liabilities of the participants (see comments below concerning its status as a separate legal entity).

You stated in your letter that "the Czech corporate law indicates that although a S.R.O. has no share capital, it is a separate entity in law distinct from its investors". We have reviewed the foreign statute and it does not appear to state, except perhaps by implication, that the S.R.O. is a separate legal entity. Other resources, including the pamphlet you submitted entitled "Investment in Czechoslovakia", indicate that the S.R.O. is considered a separate legal entity in those Republics. Should you decide to pursue this issue in the form of a request for an advance income tax ruling, it would be helpful, in addition to the company agreement, to provide statutory clarification, if possible, of the S.R.O.'s separate legal status.

In response to your final query, in the event we made a determination that a particular S.R.O. would be considered a corporation for purposes of the Act, our comments in Interpretation Bulletin IT-392 would apply since the equity of a S.R.O. is not divided into shares.

We trust you will find the above comments to your satisfaction.

Yours truly,
for Director
Reorganizations and Foreign Division
Rulings Directorate
Legislative and Intergovernmental Affairs Branch

ANGIND E
DOCNUM 9401365
REPLACES
TYPEKEY R
AUTHORDV LEGS
AUTHOR CCHOUI
DESCKEY 5
RATEKEY 1
REFDATE 940722
ETADYEAR
ETADSORT
ADMINACC LEGS
ACCESSLV LEGS99
SUBJECT Non-qualifying real property
SECTION ITA-110.6(1)
SECTION
SECTION
SECTION
SECTION
$$$$
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.

PRINCIPAL ISSUES:

• 1. Whether real property owned by a partnership or a joint venture, the members of which are unrelated individuals, and used in an active business by another partnership, the members of which are the spouses of the unrelated individuals, is non-qualifying real property within the meaning of subsection 110.6(1).
• 2. Whether the shares of a corporation (owned by unrelated individuals) that owns real property that is used in an active business by a partnership constitute "non-qualifying real property".

POSITION TAKEN:

• 1. The real property constitutes "non-qualifying real property" since it is owned jointly by unrelated individuals.
• 2. The shares constitute "non-qualifying real property" since the property is used in an active business by the spouses of unrelated individuals.

REASONS FOR POSITION TAKEN:

E9227765

5-940136
XXXXXXXXXX C. Chouinard

Attention: XXXXXXXXXX

July 22, 1994

Dear Sirs:

Re: Capital Gains Exemption - "Non-Qualifying Real Property"

We are writing in reply to your letter of January 7, 1994 wherein you requested our comments on the application of subsection 110.6(1) of the Income Tax Act (the "Act") in a situation involving the disposition of real estate.

Your concern relates to the sale of a 50% interest in real estate by a partnership or joint venture to a related corporation under section 85 of the Act. In your example, the real estate is rented by the partnership or joint venture to a partnership carrying on an active business, the partners of which are the spouses of the individuals who are partners in the first mentioned partnership or joint venture. Following this sale, the partnership will be wound-up and the partners will receive shares of the related corporation which they will then sell to discretionary family trusts.

You ask whether the sale of the 50% interest in the property to the corporation and the disposition of the shares to the discretionary family trusts would be considered a disposition of "non-qualifying real property" within the meaning of subsection 110.6(1) of the Act.

Our Comments

Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R2. Where the particular transactions are completed, as in your case, the enquiry should be addressed to the relevant District Office. The following comments are, therefore, of a general nature only, and are not binding on the Department. These comments should not be considered as confirming that the property in question is capital property generating capital gains rather than income.

With respect to your question regarding the sale of the 50% interest in the property by the partnership to the corporation, subparagraph (a)(iii) of the definition of "non-qualifying real property" would apply since that subparagraph deals with real property owned by a partnership. Real property owned by a partnership will be excluded from the definition of "non-qualifying real property" if it was used principally in an active business carried on by one of the persons described in any of clauses (a)(iii)(C) to (G). In the situation you have described, since the property is used in a business carried on by another partnership and since a partnership is not one of the persons described in clauses (C) to (G) of subparagraph (iii), the real property would be included in the definition of "non-qualifying real property".

If the 50% interest in the property was held not by a partnership but by a joint venture comprised of the individual spouses, subparagraph (a)(ii) of the definition of "non-qualifying property" would be relevant since it deals with real property owned by an individual. Where the real property is used principally in an active business carried on by one or more persons as members of a partnership, clause (a)(ii)(G) of the definition requires that interests representing all or substantially all of the fair market value of all partnership interests in the partnership be owned by one or more persons described in subparagraph (a)(ii). The question therefore is whether the persons owning the partnership interests (i.e., the spouses of the unrelated individuals) are described in Clause (a)(ii)(E) which includes a spouse of the individual. The individual referred to is the individual described in the preamble of the definition of "non-qualifying real property" who disposed of the real property in question. In our view, the expression "a spouse of the individual" cannot be interpreted as a reference to more than one individual. Thus, spouse A is not "a spouse of the individual" if the individual referred to is individual B. Therefore, if the real property were owned by a joint venture, it would constitute "non-qualifying property" since the real property would be owned jointly by unrelated individuals.

As regards your question regarding the disposition of the special shares of the related corporation to the discretionary family trusts, paragraph (b) of the definition of "non-qualifying real property" would apply since it concerns shares of a corporation, the fair market value of which is derived principally from real property. Shares of a corporation that owns real property will be excluded from the definition of "non-qualifying real property" if the real property was used principally in an active business carried on by one of the persons described in any of clauses (a)(ii)(C) to (H). Although the real property is used in a business carried on by one or more persons as members of a partnership, for reasons stated in the above paragraph, the shares would nevertheless constitute "non-qualifying real property" since the partnership interests are held by the spouses of unrelated individuals.

Unless as otherwise stated, all references to statute are to the Income Tax Act S.C. 1970-71-72, c.63, as amended, consolidated to June 10, 1993.

We trust that these comments will be of assistance.

Yours truly,

R. Albert
for Director
Business and General Division
Rulings Directorate
Policy and Legislation Branch