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:
1.Whether subsection 85(2.1) of the Act will apply to reduce the paid-up capital of shares issued in the course of a subsection 85(1) rollover which took place prior to November 21, 1985.
2.Whether shares which qualify as "shares of the capital stock of a family farm corporation" will constitute "qualified farm property" within the meaning of subsection 110.6(1) of the Act.
3.Whether subsection 110.6(8) of the Act will apply to deny the taxpayer the capital gains deduction to which he would otherwise be entitled under subsection 110.6(2) of the Act.
Position:
1.Subsection 85(2.1) will not apply.
2.The shares will qualify as "qualified farm property".
3.Subsection 110.6(8) will not apply.
Reasons:
1.Subsection 85(2.1) only applies where a disposition of property to a corporation on a rollover basis under subsections 85(1) and (2) of the Act occurs after November 21, 1985.
2.The definition of "qualified farm property" includes, under paragraph (b), a share of the capital stock of a family farm corporation.
3.The accrued capital gain in the shares likely relates to the assets transferred to the company under subsection 85(1), and not to the non-payment of dividends.
3-960034
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 1996
Dear XXXXXXXXXX
Re: XXXXXXXXXX
Advance Income Tax Ruling
This is in reply to your letters of XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of the above-mentioned taxpayer with respect to the proposed transactions described below.
To the best of your knowledge and that of your client, none of the issues involved in this ruling is being considered by a Tax Services Office or a Taxation Center in connection with any tax return already filed and none of such issues is under objection.
FACTS
1.XXXXXXXXXX (the "Company") is an XXXXXXXXXX corporation. The Company was incorporated on XXXXXXXXXX under the XXXXXXXXXX and was continued under the XXXXXXXXXX on XXXXXXXXXX.
2.The issued common shares of the Company are owned by XXXXXXXXXX (the "Taxpayer"), his wife, XXXXXXXXXX and his XXXXXXXXXX. All are Canadian residents for purposes of the Income Tax Act (the "Act").
3.The issued common shares have a nominal fair market value.
4.As of XXXXXXXXXX the authorized capital of the Company was $XXXXXXXXXX divided into XXXXXXXXXX Class"A" non-cumulative redeemable preferred shares with a par value of $XXXXXXXXXX each, XXXXXXXXXX Class "B" non-cumulative redeemable preferred shares with a par value of $XXXXXXXXXX each (the "Class B Shares") and XXXXXXXXXX Class "A" Common voting shares with a par value of $XXXXXXXXXX each.
5.Between XXXXXXXXXX the Taxpayer transferred to the Company certain depreciable property and inventory. The Taxpayer and the Company jointly elected to have the provisions of section 85 of the Act apply to these transfers (the "Rollovers") and effected complete rollovers of income and capital gains which would otherwise have been realized by the Taxpayer. The consideration paid by the Company for the transferred property included promissory notes with an aggregate fair market value equal to the tax cost to the Taxpayer of the transferred property and XXXXXXXXXX Class B Shares redeemable at the issue price of $XXXXXXXXXX per share and having an aggregate fair market value of $XXXXXXXXXX. The fair market value of the XXXXXXXXXX Class B Shares was equal to the aggregate of the gains inherent in the transferred property.
XXXXXXXXXX
6.The Company has, to date, issued no Class B Shares other than the XXXXXXXXXX Class B Shares issued in the course of the Rollovers.
7.The Company has not reduced the stated capital of its Class B Shares, except as a consequence of redemption, as described below, of XXXXXXXXXX of those shares at their stated redemption price of $XXXXXXXXXX per share:
XXXXXXXXXX
The Taxpayer inadvertently reported the redemption proceeds as deemed dividends rather than capital gains.
8.The balance of the stated capital account maintained by the Company in respect of its Class B Shares is currently $XXXXXXXXXX. There are XXXXXXXXXX Class B Shares issued and outstanding, each being redeemable at its issue price of $XXXXXXXXXX.
9.At the time of the Proposed Transaction, the Class B Shares will be "shares of the capital stock of a family farm corporation" within the meaning assigned to that term by subsection 110.6(1) of the Act, as:
(i) throughout a 24-month period ending before that time, more than 50% of the fair market value of the property owned by the Company will have been attributable to property that was used by the Company, the Taxpayer or a spouse, child or parent of the Taxpayer principally in the course of carrying on the business of farming in Canada in which the Taxpayer or a spouse, child or parent of the Taxpayer was actively engaged on a regular and continuous basis; and
(ii) at that time, all or substantially all of the fair market value of the property of the Company will be attributable to property that was used principally in the course of carrying on the business of farming in Canada by the Company.
PROPOSED TRANSACTIONS
10.The Company and the Taxpayer propose to effect the redemption of XXXXXXXXXX of the XXXXXXXXXX Class B Shares held by the Taxpayer (the "Proposed Transaction"). The Taxpayer will transfer the shares to the Company for cancellation and the Company will issue to the Taxpayer a promissory note for the aggregate redemption price of $XXXXXXXXXX.
11.The Taxpayer will claim his remaining "enhanced" capital gains deduction to offset the capital gain that will arise as a consequence of the redemption of the shares.
PURPOSE OF PROPOSED TRANSACTIONS
12.The Taxpayer wishes to crystallize XXXXXXXXXX capital gain and take advantage of the capital gains exemption in respect of qualified farm property.
RULINGS
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions, and purpose of the proposed transactions, and the proposed transactions are completed as described above, our rulings are as follows:
A.For purposes of subparagraph (b)(iii) of the definition of "paid-up capital" in subsection 89(1) of the Act, the paid-up capital computed without reference to the provisions of the Act of par value shares means the par value of those shares.
B.Provided the redemption by the Company of the XXXXXXXXXX Class B Shares held by the Taxpayer, as described in paragraph 10 above, is for an amount equal to the paid-up capital of such shares to the Taxpayer, subsection 84(3) of the Act will not apply to deem the Company to have paid and the Taxpayer to have received any dividend.
C.At the time of the Proposed Transaction, the Class B Shares will be "qualified farm property" within the meaning of subsection 110.6(1) of the Act.
D.Subsection 110.6(8) of the Act will not apply to deny any deduction that the Taxpayer may otherwise be entitled to claim under subsection 110.6(2) of the Act.
Nothing in this ruling should be construed as implying that the Department has agreed to or accepted the determination of the fair market value or adjusted cost base of any property referred to herein, or the paid-up capital of any shares. Nor should the ruling be interpreted as confirming that the Class B shares are "shares of the capital stock of a family farm corporation", as this is a question of fact the determination of which is not covered by this Ruling. This was one of the given facts and our rulings are given on the basis that all of the facts are correct.
These rulings are subject to the limitations and qualifications set out in Information Circular 70-6R2 dated September 28, 1990, and are binding on the Department provided the proposed transactions described in paragraph 4 of this Ruling are completed by XXXXXXXXXX.
Our rulings are based on the Act in its present form and do not take into consideration any proposed amendments to the Act.
Yours truly,
R. Albert
for Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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