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:
APPLICATION OF GAAR WHERE A THIRD PARTY IS INSERTED BETWEEN A CASH BASIS VENDOR AND A CASH BASIS PURCHASER IN A SALE OF CATTLE INVENTORY. THE THIRD PARTY WILL PAY THE VENDOR OVER THE LIFE OF THE CATTLE AND THE PURCHASER WILL PAY CASH TO THE THIRD PARTY.
Position TAKEN:
GAAR WOULD BE CONSIDERED IN THIS TYPE OF SITUATION.
Reasons FOR POSITION TAKEN:
THE INSERTION OF THE THIRD PARTY APPEARS TO BE SOLELY FOR THE PURPOSE OF ALLOWING THE PURCHASER TO DEDUCT THE CATTLE PURCHASE IN THE YEAR OF SALE AND TO ALLOW THE VENDOR TO REPORT HIS PROCEEDS OVER THE LIFE OF THE CATTLE.
941637
XXXXXXXXXX Wm. P. Guglich
Attention: XXXXXXXXXX
January 30, 1995
Dear Sirs:
Re: Incorporation of Ranch Assets and Sale Thereafter
This is in reply to your letter June 10, 1994 wherein you described a situation where a taxpayer intends to sell his ranch which includes approximately $500,000 of cattle inventory. The taxpayer wishes to sell all his ranch assets including land, buildings, machinery, equipment and inventories to a company. The company would carry on the farming business until the assets are sold. We apologize for the delay in our response.
As the sale of the inventory, recapture, etc., would likely produce taxable income in excess of the $200,000 small business deduction in the year, the taxpayer desires to receive his inventory proceeds over a period of years. We understand the taxpayer computes his income on the cash basis under section 28 of the Income Tax Act ("the Act").
The taxpayer proposes to insert a third party between himself and the real ranch purchaser to sell the cattle as follows:
1.The vendor and the purchaser would agree on a price for the cattle.
2.The vendor would then sell the cattle at the same price or perhaps a slightly discounted price to a third party who would immediately turn around and sell the cattle, most likely for cash, to the ranch purchaser.
3.The vendor would take back a secured note with annual payments over the estimated life of the cattle involved.
You are concerned that the general anti-avoidance rule ("GAAR") might apply to this cattle transaction.
It appears that the interpretation you seek relates to a proposed transaction to be undertaken by a specific taxpayer and, therefore, we bring to your attention Information Circular 70-6R2 dated September 28, 1990 issued by Revenue Canada, Taxation. Confirmation with respect to proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. If you wish to obtain an advance income tax ruling for a particular taxpayer with respect to specific transactions which are contemplated, a written request for an advance income tax ruling can be submitted in accordance with the Information Circular. Nevertheless, we can offer the following general comments.
Before the application of GAAR may be considered in a particular case it is necessary to determine all other provisions of the Act that may apply. Some of the provisions, inter alia, that would be considered in the proposed cattle sale are the application of subsection 28(5) and section 76 of the Act. We would also need to consider whether the inserted third party was an agent of either the vendor or the purchaser so that the sale was in effect between the vendor and the purchaser as principals.
The application of GAAR would be considered in the type of situation you described. Whether or not GAAR would apply in a particular case would be dependent on the tax consequences otherwise determined and on the specific facts in the case. Where the sale to the inserted third party is entered into merely as an avoidance transaction GAAR would be relevant.
We trust our comments will be of assistance to you.
Yours truly,
R. Albert
for Director
Business and General Division
Rulings Directorate
Policy and Legislation Branch
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