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:
Parked Debt
1) Acquired by non-arm's length ?
2) Acquired by arm's length ?
Position:
1) Not a parked obligation
2) Yes, a parked obligation
Reasons:
1) not a specified obligation per 80.01(6)
2) becomes a parked obligation at any time per 80.01(7)(b)
960532
XXXXXXXXXX C. Tremblay
Attention: XXXXXXXXXX
May 16, 1996
Dear Sirs:
Re: Parked Debt Obligations
This is in reply to your letter of January 31, 1996, wherein you requested our opinion in respect to a hypothetical situation with regards to the application of subsections 80.01(6) to 80.01(8) of the Income Tax Act (the "Act").
The situations that are described appear to involve a series of actual proposed transactions. It is not our practice to give written opinions concerning proposed transactions, as indicated in Information Circular 70-6R2. Should you wish to request an advance ruling on these or other transactions which may be proposed, please refer to Information Circular 70-6R2 for the procedure to be followed. If, however, your request describes completed transactions involving a specific taxpayer, your questions should be directed to your District Taxation Office which has the responsibility of determining the tax consequences of completed transactions and their implications to the specific taxpayers. Although we are unable to provide any opinion in respect of the specific transactions described in your letter, we have set out some general comments which may be of some assistance.
Subsection 80.01(6) to 80.01(8) of the Act contain provisions that are designed to counter the "parking" of a commercial debt obligation. In order for the rules to apply, only a specified obligation as defined by subsection 80.01(6) of the Act can become a parked obligation as defined by subsection 80.01(7) of the Act.
A specified obligation of a debtor at a particular time is an obligation issued by the debtor where, at any previous time, the obligation was owned by a person who dealt at arm's length with the debtor or, if the debtor is a corporation who, did not have a significant interest in the debtor or the holder of the obligation acquired it from a person who, at the time of acquisition, was either not related to the debt holder or the obligation is a bad debt that was deemed by subsection 50(1) of the Act to be reacquired at the particular time.
By virtue of paragraph 80.01(2)(b) of the Act, a person has a significant interest in a debtor corporation if the person owns shares of the debtor corporation to which at least 25% of the votes or value are attributable. For this purpose, a person is deemed to own any debtor corporation shares owned by other persons with whom that person does not deal at arm's length.
A specified obligation becomes a parked obligation if it is transferred to a person that does not deal at arm's length with the debtor or a person with significant interest in the debtor. Pursuant to paragraph 80.01(7)(b) of the Act, an obligation that is, at any time, acquired or reacquired in circumstances to which subparagraph 80.01(6)(a)(ii) (acquisition from unrelated person) or paragraph 80.01(6)(b) (reacquisitions under subsection 50(1) of the Act) applies shall, if the obligation is a parked obligation immediately after that time, be deemed to have become a parked obligation at that time, whether or not the obligation was a parked obligation immediately before that time.
Accordingly, where a person sells his interest in a corporation to another person with whom he deals at non-arms length for a minimal sum and where both persons had a significant interest in the corporation before such sale, the obligation will not become a parked obligation at the time of the sale because the obligation is not a specified obligation.
However, in our view, where a person who has a substantial interest in a corporation sells his interest to an unrelated person for a minimal sum, the obligation is subject to section 80 of the Act as it is deemed to be a parked obligation. Although the obligation may not satisfy the requirement as a specified obligation at the time it is acquired, it does immediately after it is acquired pursuant to paragraph 80.01(7)(b) of the Act and, accordingly, is deemed to be a parked obligation at the time the obligation is acquired.
We trust our comments will be of assistance to you.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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