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: Allocation of partnership income and losses
Position: See issue sheet
Reasons: See issue sheet
xxxxxxxxxx 3-982916
Attention: XXXXXXXXXX
XXXXXXXXXX, 1999
Dear Sirs:
Re: XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
This is in reply to your letter of XXXXXXXXXX in which you requested various advance income tax rulings and an advance GST/HST ruling. We also acknowledge your letters of XXXXXXXXXX and our various telephone conversations.
We understand that to the best of your knowledge, and that of the taxpayers involved, none of the issues contained herein:
(i) is in an earlier return of the taxpayers or a related person
(ii) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayers or a related person;
(iii)is under objection by the taxpayers or a related person;
(iv) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired;
(v) is the subject of a ruling previously issued by the Directorates; or
(vi) is being considered by a Revenue Canada Office in connection with a GSTIHST return already filed.
Taxpayers' Address:
The mailing address for all of the above-noted taxpayers with respect to tax correspondence is as follows:
XXXXXXXXXX.
DEFINITIONS
in this letter unless otherwise expressly stated:
(a) "Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1., as amended to the date hereof, and unless otherwise stated, every reference herein to a part, section, subsection, paragraph, subparagraph or clause is a reference to the relevant provision of the Act;
(b) XXXXXXXXXX;
(c) "adjusted cost base" has the meaning assigned by section 54;
(d) "affiliated group of persons" has the meaning assigned by subsection 251.1(3);
(e) "agreed amount" means the amount agreed upon by the transferor and transferee for the purposes of subsection 85(1);
(f) "associated corporations" has the meaning assigned by subsection 256(l);
(g) "CBCA" means the Canada Business Corporations Act;
(h) "Canadian corporation" has the meaning assigned by subsection 89(1);
(i) "Canadian partnership" has the meaning assigned by subsection 102(1);
(j) "capital property" has the meaning assigned by section 54;
(k) "cost amount" has the meaning assigned under subsection 248(1);
(1) "depreciable property" has the meaning assigned by subsection 248(1);
(m) "eligible capital property" has the meaning assigned by section 54;
(n) "eligible property" has the meaning assigned by subsection 85(1.1);
(o) "non-capital loss" has the meaning assigned by subsection 111(8);
(p) "predecessor corporation" has the meaning assigned by subsection 87(1);
(q) "principal amount" has the meaning assigned by subsection 248(1);
(r) "public corporation" has the meaning assigned by subsection 89(1);
(s) "specified shareholder" has the meaning assigned by subsection 248(1);
(t) "subsidiary wholly-owned corporation" has the meaning assigned by subsection 248(1);
(u) "taxable Canadian corporation" has the meaning assigned by subsection 89(1); and
(v) "ETA" means the Excise Tax Act .
FACTS
1. XXXXXXXXXX was incorporated under the laws of the province of XXXXXXXXXX is a public corporation and a taxable Canadian corporation.
The shares of XXXXXXXXXX are widely held and to the taxpayers' knowledge there are no specified shareholders in XXXXXXXXXX as at XXXXXXXXXX. In XXXXXXXXXX, had held XXXXXXXXXX% of the issued and outstanding shares of XXXXXXXXXX.
2. XXXXXXXXXX were all incorporated under the CBCA. XXXXXXXXXX are all taxable Canadian corporations and are subsidiary wholly-owned corporations of XXXXXXXXXX.
3. XXXXXXXXXX was incorporated under the laws of the province of XXXXXXXXXX is a taxable Canadian corporation and is a subsidiary wholly-owned corporation of XXXXXXXXXX.
4. XXXXXXXXXX (collectively, the "XXXXXXXXXX Group") each have a floating year end with a taxation year ending on XXXXXXXXXX.
5. The major business activity of the XXXXXXXXXX Group is the XXXXXXXXXX.
The number of full-time and part-time employees of the XXXXXXXXXX Group as at XXXXXXXXXX were as follows:
Company Number of Employees
XXXXXXXXXX
5.1 XXXXXXXXXX
5.2 XXXXXXXXXX
6. The assets of the XXXXXXXXXX Group which relate to the XXXXXXXXXX owned by the XXXXXXXXXX Group (the "XXXXXXXXXX Assets") and the assets which relate to the XXXXXXXXXX (the "XXXXXXXXXX Assets") described in the proposed transactions below are mainly eligible property.
7. The accumulated non-capital losses of the XXXXXXXXXX Group, as at XXXXXXXXXX, were as follows:
xxxxxx xxxxxx xxxxxx xxxxxx xxxxxx xxxxxx xxxxxx
xxxxxxx xxxxxxx xxxxxxx xxxxxxxx
xxxxxxx xxxxxxx xxxxxxx xxxxxxx xxxxxxxx
xxxxxxx xxxxxxx xxxxxxx xxxxxxxx
xxxxxxx xxxxxxx xxxxxxxx
xxxxxxx xxxxxxx xxxxxxx xxxxxxxx
xxxxxxx xxxxxxx xxxxxxx xxxxxxxx
xxxxxxx xxxxxxx xxxxxxx xxxxxxx xxxxxxx xxxxxxx xxxxxxxx
The proposed transactions described herein will have no effect on any outstanding tax liabilities of any of the parties referred to in this ruling request.
PROPOSED TRANSACTIONS
8. XXXXXXXXXX will, following the receipt of the rulings described herein and before XXXXXXXXXX, incorporate a new company ("XXXXXXXXXX Co") under the XXXXXXXXXX. XXXXXXXXXX Co will be a taxable Canadian corporation and its first taxation year-end will be XXXXXXXXXX.
The authorized share capital of XXXXXXXXXX Co will consist of common shares and preferred shares. The XXXXXXXXXX Co preferred shares will be redeemable and retractable for a redemption price equal to the fair market value of the consideration for which the shares are issued, entitled to dividends and each share will be non-voting.
9. On XXXXXXXXXX, each of XXXXXXXXXX will transfer, at fair market value, its XXXXXXXXXX Assets to XXXXXXXXXX Co. In consideration for such transfers, XXXXXXXXXX Co will assume liabilities, relating to the XXXXXXXXXX Assets transferred, issue to each transferor an interest-bearing promissory note and preferred shares, with a redemption and retraction amount and fair market value equal to the amount by which the fair market value, at the time of the disposition, of the transferred properties of the particular transferor that will be received by XXXXXXXXXX Co exceeds the aggregate of the liabilities assumed and the interest-bearing promissory note issued to that transferor.
9.1 XXXXXXXXXX will supply XXXXXXXXXX Assets to XXXXXXXXXX Co consisting of all inventory, leasehold improvements, building, equipment and land. The building and land are used as the head office of the XXXXXXXXXX Group. XXXXXXXXXX will assign to XXXXXXXXXX Co the use of intangible assets, such as trademarks and real property leases, which are required to carry out the business.
9.2 XXXXXXXXXX will supply xxxxxxxxxx Assets to XXXXXXXXXx Co consisting of all inventory, leasehold improvements and equipment. XXXXXXXXXX will assign to xxxxxxxxxx Co the use of intangible assets, such as trademarks and real property leases, which are required to carry out the business.
9.3 XXXXXXXXXX will supply XXXXXXXXXX Assets to XXXXXXXXXX Co consisting of all inventory, leasehold improvements, equipment and Other Assets that relate to the operation of XXXXXXXXXX business. XXXXXXXXXX will assign to XXXXXXXXXX Co the use of intangible assets, such as trademarks and real property leases, which are required to carry out the business.
10. In respect of the transfers described in paragraph 9 above, each of xxxxxxxxxx will jointly elect with XXXXXXXXXX Co in prescribed form within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the respective transfers. The agreed amount in respect of each eligible property so transferred will be equal to:
(a) in the case of capital property (other than depreciable property of a prescribed class) and inventory, an amount equal to the lesser of the amounts described in subparagraphs 85(1)(c. l)(i) and (ii),
(b) in the case of depreciable property of prescribed class, an amount equal to the least of the amounts described in subparagraphs 85(l)(e)(i), (ii) and (iii); and
(c) in the case of eligible capital property, an amount equal to the least of the amounts described in subparagraphs 85(l)(d)(i), (ii) and (iii), however, the agreed amount in respect of any particular property will not be less than $XXXXXXXXXX.
The agreed amount in respect of any eligible property transferred will not exceed the fair market value of such property or be less than the fair market value of the nonshare consideration received on the transfer.
XXXXXXXXXX Co will add to the stated capital account maintained for its preferred shares issued to each of XXXXXXXXXX, in respect of the transfers described in paragraph 9 above, an amount not exceeding the aggregate of the agreed amounts in respect of eligible property and the fair market value of all other properties transferred less the fair market value of the liabilities assumed and the promissory note issued to each transferor.
10.1 XXXXXXXXXX Co will be registered for GST/HST purposes at the time the transactions referred to in paragraphs 9.1 to 9,3 take place. Each of XXXXXXXXXX will jointly elect with XXXXXXXXXX Co, in prescribed form and manner, within the time limit referred to in subsection 167(1.1) of the ETA to have subsection 167(1.1) apply to the supply of XXXXXXXXXX Assets, as described in paragraphs 9.1 to 9.3, respectively.
11. XXXXXXXXXX will, following the receipt of the rulings described herein and before XXXXXXXXXX, incorporate a new company ("XXXXXXXXXX Co") under the XXXXXXXXXX. XXXXXXXXXX Co will be a taxable Canadian corporation and its first taxation year-end will be XXXXXXXXXX.
The authorized share capital of XXXXXXXXXX Co will consist of common shares and preferred shares, The XXXXXXXXXX Co preferred shares will be redeemable and retractable for a redemption price equal to the fair market value of the consideration for which the shares are issued, entitled to dividends and each share will be non-voting.
12. On XXXXXXXXXX, each of XXXXXXXXXX will transfer, at fair market value, all its XXXXXXXXXX Assets to XXXXXXXXXX Co. In consideration for such transfers, XXXXXXXXXXx Co will assume liabilities, relating to the XXXXXXXXXX Assets transferred, issue to each transferor an interest-bearing promissory note and preferred shares, with a redemption and retraction amount and fair market value equal to the amount by which the fair market value, at the time of the disposition, of the transferred properties of the particular transferor that will be received by XXXXXXXXXX Co exceeds the aggregate of the liabilities assumed and the interest-bearing promissory note issued to that transferor.
12.1 XXXXXXXXXX will supply XXXXXXXXXX Assets to XXXXXXXXXX Co consisting of all inventory, and equipment that relate to the operation of XXXXXXXXXX business. XXXXXXXXXX will assign to XXXXXXXXXX Co the use of intangible assets, such as trademarks and leases, which are required to carry out the business. XXXXXXXXXX Co will also receive a "right to use" the leased office space, located in XXXXXXXXXX that was used in the operation of XXXXXXXXXX business.
13. In respect of the transfers described in paragraph 12 above, each of XXXXXXXXXX will jointly elect with XXXXXXXXXX apply to the respective transfers. The agreed amount in respect of each eligible property so transferred will be equal to:
(a) in the case of capital property (other than depreciable property of a prescribed class) and inventory, an amount equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii);
(b) in the case of depreciable property of prescribed class, an amount equal to the least of the amounts described in subparagraphs 85(l)(e)(i), (ii) and (iii); and
(c) in the case of eligible capital property, an amount equal to the least of the amounts described in subparagraphs. 85(1)(d)(i), (ii) and (iii), however, the agreed amount in respect of any particular property will not be less than $XXXXXXXXXX.
The agreed amount in respect of any eligible property transferred will not exceed the fair market value of such property or be less than the fair market value of the nonshare consideration received on the transfer.
XXXXXXXXXX Co will add to the stated capital account maintained for its preferred shares issued to each of XXXXXXXXXX, in respect of the transfers described in paragraph 12 above, an amount not exceeding the aggregate of the agreed amounts in respect of eligible property and the fair market value of all other properties transferred less the fair market value of the liabilities assumed and the promissory note issued to each transferor.
13.1 XXXXXXXXXX Co will be registered for GST/HST purposes at the time the transaction referred to in paragraph 12.1 takes place. XXXXXXXXXX will jointly elect with XXXXXXXXXX Co, in prescribed form and manner, within the time limit referred to in subsection 167(1.1) of the ETA to have subsection 167(1.1) apply to the supply of XXXXXXXXXX Assets, as described in paragraph 12.1.
14. The transfer of the XXXXXXXXXX Assets and XXXXXXXXXX Assets from the XXXXXXXXXX Group to XXXXXXXXXX Co and XXXXXXXXXX Co, respectively, on XXXXXXXXXX will be carried out in order to facilitate the payroll conversion of all transferred operational employees in these corporations. Due to the number of employees in each XXXXXXXXXX entity within the XXXXXXXXXX Group, the ability to not have an employee recorded as working in more than one entity will result in a reduction in payroll expenses to be incurred.
15. Each of XXXXXXXXXX will be continued under the XXXXXXXXXX. On XXXXXXXXXX (referred to in this paragraph as "predecessor corporations") will amalgamate under the provisions of the XXXXXXXXXX to form a new corporation ("XXXXXXXXXX Holdco") in such a manner that:
(a) all of the property (except any amounts receivable from any predecessor corporation or shares of the capital stock of any predecessor corporation) of the predecessor corporations immediately before the merger will become property of XXXXXXXXXX Holdco by virtue of the merger;
(b) all of the liabilities (except any amounts payable to any predecessor corporation) of the predecessor corporations immediately before the merger will become liabilities of XXXXXXXXXX Holdco by virtue of the merger; and
(c) all the shares of XXXXXXXXXX will be cancelled on the amalgamation and the shareholders of XXXXXXXXXX will become the shareholders of XXXXXXXXXX Holdco with no shares of XXXXXXXXXX Holdco being issued on the amalgamation.
16. On XXXXXXXXXX Holdco and XXXXXXXXXX Co will create a new partnership ("XXXXXXXXXX Partnership") under the laws of the province of XXXXXXXXXX. XXXXXXXXXX Partnership will be a Canadian partnership and its business will be to own and operate the XXXXXXXXXX. XXXXXXXXxX Co will transfer at fair market value all of its XXXXXXXXXX Assets to XXXXXXXXXX Partnership. As consideration for the sale, XXXXXXXXXX Partnership will assume liabilities of XXXXXXXXXX Co.(which will include the interest-bearing promissory notes issued in the transfers described in paragraph 9 above) and receive an interest-bearing promissory note and a partnership interest. As a result of the transfer, XXXXXXXXXX Co's partnership interest in XXXXXXXXXX Partnership will have a nominal adjusted cost base and a fair market value of approximately $XXXXXXXXXX. It is intended that the XXXXXXXXXX Co will transfer beneficial interest of its assets to XXXXXXXXXX Partnership but will continue to hold legal title of such assets as a bare trustee for XXXXXXXXXX Partnership.
XXXXXXXXXX Holdco will contribute cash (in an amount that will exceed the aggregate principal amount of the interestbearing promissory notes issued in the transfers described in paragraph 9 above and acquired by XXXXXXXXXX Holdco as a result of the amalgamation described in paragraph 15 above) and notes receivable to XXXXXXXXXX Partnership and as sole consideration for the transfer, XXXXXXXXXX Holdco will receive an interest in XXXXXXXXXX Partnership. As a result o f the transfer, XXXXXXXXXX Holdco's partnership interest in XXXXXXXXXX Partnership will have an adjusted cost base and fair market value of approximately $XXXXXXXXXX.
16.1 XXXXXXXXXX Co will supply XXXXXXXXXX Assets to XXXXXXXXXX Partnership consisting of all inventory, leasehold improvements, building, equipment and land. XXXXXXXXXX Partnership will be assigned the use of intangible assets, such as trademarks and leases, which are required to carry out the business.
17. In respect of the transfer of XXXXXXXXXX Co's XXXXXXXXXX Assets to XXXXXXXXXX Partnership described in paragraph 16 above, XXXXXXXXXX Co will jointly elect with xxxxxxxxxx Holdco, in prescribed form, within the time limit referred to in subsection 96(4) to have the provisions of subsection 97(2) apply to the transfer. The agreed amount for the purposes of paragraph 85(l)(a) in respect of each eligible property so transferred will be equal to:
(a) in the case of capital property (other than depreciable property of a prescribed class) and inventory, an amount equal to the lesser of the amounts described in subparagraphs 85(J)(c.l)(i) and (ii);
(b) in the case of depreciable property of a prescribed class, an amount equal to the least of the amounts described in subparagraphs 85(1)(e)(i), (ii) and (iii). and
(c) in the case of eligible capital property, an amount equal to the least of the amounts described in subparagraphs 85(1)(d)(i), (ii) and (iii), however, the agreed amount in respect of any particular property will not be less than $XXXXXXXXXX.
The agreed amount in respect of any eligible property transferred will not be less than the fair market value of consideration, other than an interest in the partnership, relating to the transfer of such property, and will not exceed the fair market value of each such property at the time of the transfer.
17.1 XXXXXXXXXX Partnership will be registered for GSTIHST purposes at the time the transaction referred to in paragraph 16.1 takes place. XXXXXXXXXX Co will jointly elect with XXXXXXXXXX Partnership, in prescribed form and manner, within the time limit referred to in subsection 167(1.1) of the ETA to have subsection 167(1.1) apply to the supply of XXXXXXXXXX Assets, as described in paragraph 16.1.
18. XXXXXXXXXX Partnership will utilize the cash received on the transfer of assets from XXXXXXXXXX Holdco to repay certain of the liabilities assumed on the transfer of properties from XXXXXXXXXX Co including the interest-bearing promissory notes.
19. On XXXXXXXXXX Holdco and XXXXXXXXXX Co will create a new partnership ("XXXXXXXXXX Partnership") under the laws of the province of XXXXXXXXXX. XXXXXXXXXX Partnership will be a Canadian partnership and its business will be to own and operate the XXXXXXXXXX that are operated under a XXXXXXXXXX agreement.
XXXXXXXXXX Co will transfer at fair market value all of its XXXXXXXXXX Assets to XXXXXXXXXX Partnership. As consideration for the sale, XXXXXXXXXX Partnership will assume liabilities of XXXXXXXXXX Co.(which will include the interest-bearing promissory notes issued in the transfers described in paragraph 12 above) and receive an interest-bearing promissory note and a partnership interest. As a result of the transfer, XXXXXXXXXX Co's partnership interest in XXXXXXXXXX Partnership will have a nominal adjusted cost base and a fair market value of a nominal amount. It is intended that XXXXXXXXXX Co will transfer beneficial interest of its assets to XXXXXXXXXX Partnership but will continue to hold legal title of such assets as a bare trustee for XXXXXXXXXX Partnership.
XXXXXXXXXX Holdco will contribute cash (in an amount that will exceed the aggregate principal amount of the interestbearing promissory notes issued in the transfers described in paragraph 12 above and acquired by XXXXXXXXXX Holdco as a result of the amalgamation described in paragraph 15 above) and notes receivable to XXXXXXXXXX Partnership and as sole consideration for the transfer, XXXXXXXXXX Holdco will receive an interest in XXXXXXXXXX Partnership. As a result of the transfer, XXXXXXXXXX Holdco's partnership interest in XXXXXXXXXX Partnership will have an adjusted cost base of a nominal amount and fair market value of approximately $XXXXXXXXXX.
19.1 XXXXXXXXXX Co will supply XXXXXXXXXX Assets to XXXXXXXXXX Partnership consisting of all inventory and equipment. XXXXXXXXXX Partnership wilt be assigned the use of intangible assets, such as trademarks and leases, and will receive a "right to use" the leased office space of XXXXXXXXXX, which are required to carry out the business.
20. In respect of the transfer of XXXXXXXXXX Co's XXXXXXXXXX Assets to XXXXXXXXXX Partnership described in paragraph 19 above, XXXXXXXXXX Co will jointly elect with XXXXXXXXXX Holdco, in prescribed form, within the time limit referred to in subsection 96(4) to have the provisions of subsection 97(2) apply to the transfer. The agreed amount for the purposes of paragraph 85(l)(a) in respect of each eligible property so transferred will be equal to:
(i) in the case of capital property (other than depreciable property of a prescribed class) and inventory, an amount equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii);
(ii) in the case of depreciable property of a prescribed class, an amount equal to the least of the amounts described in subparagraphs 85(l)(e)(i), (ii) and (iii), and
(iii)in the case of eligible capital property, an amount equal to the least of the amounts described in subparagraphs 85(1)(d)(i), (ii) and (iii), however, the agreed amount in respect of any particular property will not be less than $XXXXXXXXXX.
The agreed amount in respect of any eligible property transferred will not be less than the fair market value of consideration, other than an interest in the partnership, relating to the transfer of such property, and will not exceed the fair value of each such property at the time of the transfer.
20.1 XXXXXXXXXX Partnership will be registered for GST/HST purposes at the time the transaction referred to in paragraph 19.1 takes place. XXXXXXXXXX Co will jointly elect with XXXXXXXXXX Partnership, in prescribed form and manner, within the time limit referred to in subsection 167(1.1) of the ETA to have subsection 167(1.1) apply to the supply of XXXXXXXXXX Assets, as described in paragraph 19.1.
21. XXXXXXXXXX Partnership will utilize the cash received on the transfer of assets from XXXXXXXXXX Holdco to repay certain of the liabilities assumed on the transfer of properties from XXXXXXXXXX Co including the interest-bearing promissory notes.
22. Key management personnel for XXXXXXXXXX Co, XXXXXXXXXX Co, XXXXXXXXXX Partnership and XXXXXXXXXX Partnership will be employees of XXXXXXXXXX Holdco and they will be directly responsible for making strategic business decisions for the partnerships. All other personnel will remain employees of XXXXXXXXXX Co or XXXXXXXXXX Co, as the case may be.
23. The XXXXXXXXXX Partnership and XXXXXXXXXX Partnership agreements will contain a clause to allocate income or losses amongst the members of the respective partnership. Income will first be allocated to XXXXXXXXXX Holdco, XXXXXXXXXX Co or XXXXXXXXXX Co, as the case may be, in order to compensate them for salary and related expenses generated by their employees' involvement in the respective partnership's operations.
The remaining income or losses of each of XXXXXXXXXX Partnership and XXXXXXXXXX Partnership will be allocated prorata based on the respective partner's capital invested in the partnership and its involvement in operations.
24. Subsequent to the utilization of the accumulated non-capital losses in XXXXXXXXXX Holdco, XXXXXXXXXX Holdco will transfer, at fair market value, its interest in the XXXXXXXXXX Partnership to XXXXXXXXXX Co. As sole consideration, XXXXXXXXXX Co will issue to XXXXXXXXXX Holdco an interestbearing promissory note and common shares with an aggregate fair market value at the time of the transfer equal to the fair market value of XXXXXXXXXX Holdco's partnership interest in the XXXXXXXXXX Partnership.
XXXXXXXXXX Co will add to the stated capital account maintained for its common shares issued to XXXXXXXXXX Holdco in respect of the transfer described herein, an amount not exceeding the amount of the adjusted cost base of XXXXXXXXXX Holdco's partnership interest in the XXXXXXXXXX Partnership immediately before the disposition of such interest to XXXXXXXXXX Co less the fair market value of the promissory note issued by XXXXXXXXXX Co.
25. In respect of the transfer described in paragraph 24 above, XXXXXXXXXX Hoidco will jointly elect with XXXXXXXXXX Co in prescribed form within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of XXXXXXXXXX Holdco's partnership interest in the XXXXXXXXXX Partnership. The agreed amount in respect of the partnership interest transferred will be an amount equal to the lesser of the amounts described in subparagraph 85(1).(c.1)(i) and (ii) and will not be less than the amount of non-share consideration received as consideration.
26. XXXXXXXXXX Holdco and XXXXXXXXXX Co will file appropriate registrations pursuant to the laws of the province of XXXXXXXXXX to dissolve the XXXXXXXXXX Partnership and the assets formerly belonging to the XXXXXXXXXX Partnership will then belong to XXXXXXXXXX Co. XXXXXXXXXX Co will continue to carry on the business of XXXXXXXXXX, and in carrying on that business will continue to use the assets formerly belonging to the XXXXXXXXXX Partnership in carrying on the business of the XXXXXXXXXX Partnership.
27. Subsequent to the utilization of the accumulated non-capital losses in XXXXXXXXXX Holdco, XXXXXXXXXX Holdco will transfer, at fair market value, its interest in the XXXXXXXXXX Partnership to XXXXXXXXXX Co. As sole consideration, XXXXXXXXXX Co will issue to XXXXXXXXXX Holdco an interestbearing promissory note and common shares with an aggregate fair market value at the time of the transfer equal to the fair market value of XXXXXXXXXX Holdco's partnership interest in the XXXXXXXXXX Partnership. XXXXXXXXXX Co Will add to the stated capital account maintained for its common shares issued to XXXXXXXXXX Holdco in respect of the transfer described herein, an amount not exceeding the amount of the adjusted cost base of XXXXXXXXXX Holdco's partnership interest in the XXXXXXXXXX Partnership immediately before the disposition of such interest to XXXXXXXXXX Co less the fair market value of the promissory note issued by XXXXXXXXXX Co.
28. In respect of the transfer described in paragraph 27 above, XXXXXXXXXX Holdco will jointly elect with XXXXXXXXXX Co in prescribed form within the limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of XXXXXXXXXX Holdco's partnership interest in the XXXXXXXXXX Partnership. The agreed amount in respect of the partnership interest transferred will be an amount equal to the lesser of the amounts described in subparagraphs 85(1)(c.l)(i) and (ii) and will not be less than the amount of non-share consideration received as consideration.
29. XXXXXXXXXX Holdco and XXXXXXXXXX Co will file appropriate registrations pursuant to the laws of the province of XXXXXXXXXX to dissolve the XXXXXXXXXX Partnership and the assets formerly belonging to the XXXXXXXXXX Partnership will then belong to XXXXXXXXXX Co. XXXXXXXXXX Co will continue to carry on the business of XXXXXXXXXX, and in carrying on that business, will continue to use the assets formerly belonging to the XXXXXXXXXX Partnership in carrying on the business of the XXXXXXXxxx Partnership.
PURPOSES OF THE PROPOSED TRANACTIONS
30. The purposes of the Proposed Transactions are:
(i) to allow the taxpayers to reorganize their business structure and the accounting related thereto along two discrete lines of business, XXXXXXXXXX. This will reduce the administrative burden of managing and accounting for operating companies with mixed activities and will facilitate any potential sale or equity issue of the XXXXXXXXXX business;
(ii) to allow for the utilization of the accumulated noncapital losses of the XXXXXXXXXX group to offset the income generated by the XXXXXXXXXX in the fiscal year ending XXXXXXXXXX and in future years; and
(iii) to minimize the payroll costs associated with the preparation of more than one T4 for an employee and the direct costs associated with the employer's portion of Employment Insurance and Canada Pension Plan contributions.
RULINGS
Income Tax Rulings
Provided that the above statements are accurate and constitute complete disclosure of all of the relevant facts, proposed transactions and the purposes of the proposed transactions, we confirm the following:
A. On the transfer of each eligible property of:
(i) XXXXXXXXXX to XXXXXXXXXX Co described in paragraph 9 above;
(ii) XXXXXXXXXX to XXXXXXXXXX Co described in paragraph 12 above;
(iii) XXXXXXXXXX Holdco to XXXXXXXXXX Co described in paragraph 24 above; and
(iv) XXXXXXXXXX Holdco to XXXXXXXXXX Co described in paragraph 27 above
the provisions of subsection 85(1) will apply with the result that the amount agreed upon by the transferor and the transferee in their joint election in respect of the transferred property will be deemed pursuant to paragraph 85(1)(a) to be the proceeds of disposition thereof to the transferor and cost thereof to the transferee.
B. On the transfer of each eligible property of:
(i) XXXXXXXXXX Co to the XXXXXXXXXX Partnership described in paragraph 16 above; and
(ii) XXXXXXXXXX Co to the XXXXXXXXXX Partnership described in paragraph 19 above the provisions of subsection 97(2) will apply with the result that the amount agreed upon by the transferor and the transferee in their joint election in respect of the transferred property will be deemed pursuant to paragraph 85(1)(a) to be the proceeds of disposition thereof to the transferor and cost thereof to the transferee.
C. The provisions of subsection 98(5) will apply to the dissolution of the. XXXXXXXXXX Partnership provided that XXXXXXXXXX Co continues to carry on the business of the XXXXXXXXXX Partnership, using the partnership property received by it as proceeds of disposition of its partnership interest in the transaction described in paragraph 26 above,
D. The provisions of subsection 98(5) will apply to the dissolution of the XXXXXXXXXX Partnership provided that XXXXXXXXXX Co continues to carry on the business of the XXXXXXXXXX Partnership, using the partnership property received by it as proceeds of disposition of its partnership interest in the transaction described in paragraph 29 above.
E. Provided the allocation of the loss or income of the XXXXXXXXXX Partnership or XXXXXXXXXX Partnership is as described in paragraph 23 above, subsections 103(1) and 103(1.1) will not apply to redetermine such allocations of loss or income.
F. Provided that:
(i) XXXXXXXXXX Co acquired the properties transferred from each of XXXXXXXXXX, as described in paragraph 9 above;
(ii) XXXXXXXXXX Co acquired the properties transferred from each of XXXXXXXXXX, as described in paragraph 12 above;
for the purpose of gaining or producing income (other than income which is exempt from taxation) from such properties and each transferee has a legal obligation to pay interest in respect of the promissory notes issued as consideration for the transfer of such properties, each transferee will be entitled to deduct under paragraph 20(1)(c), in computing its income for a taxation year, the lesser of such interest and a reasonable amount in respect thereof paid in the year or payable in respect of the year (depending on the method each transferee regularly follows in computing its income for the purposes of the Act)
G. Upon the amalgamation of XXXXXXXXXX described in paragraph 15 above;
(i) by virtue of subsection 87(1.1), the provisions of subsection 87(1) will apply; and
(ii) the provisions of subsection 87(2.1) will apply to deem XXXXXXXXXX Holdco to be the same corporation as, and a continuation of each predecessor corporation for the purposes set out therein.
H. The provisions of subsections 15(1), 56(2) and 246(1) will not apply to any of the proposed transactions described herein, in and by themselves.
I. The provisions of subsection 245(2) will not be applied as a result of the proposed transactions, in and by themselves, to re-determine the tax consequences confirmed in the rulings given.
These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R3 dated December30, 1996 issued by Revenue Canada and are binding provided that the proposed transactions are completed before XXXXXXXXXX, other than the proposed transactions described in paragraphs 24 to 29 above.
These rulings are based on the Act as it currently reads and do not take into account any future amendments, whether currently proposed or not, to the Act.
GST/HST Ruling
Provided that the preceding statements constitute a complete and accurate disclosure of all the facts, the proposed transactions, and the purpose of the proposed transactions, and provided that the proposed transactions are completed as described above, our ruling is as follows:
With respect to the Supply of property by:
(i) XXXXXXXXXX to XXXXXXXXXX Co, as described in paragraph 9.1;
(ii) XXXXXXXXXX to XXXXXXXXXX Co, as described in paragraph 9.2;
(iii)XXXXXXXXXX to XXXXXXXXXX Co, as described in paragraph 9.3;
(iv) XXXXXXXXXX to XXXXXXXXXX Co, as described in paragraph 12.1;
(v) XXXXXXXXXX Co to XXXXXXXXXX Partnership, as described in paragraph 16.1; and
(vi) XXXXXXXXXX Co to XXXXXXXXXX Partnership, as described in paragraph 19.1
the provisions of subsection 167(1.1) of the ETA will apply.
This ruling is given subject to the limitations and qualifications set out in section 1.4 of Chapter 1 of the GST/HST Memoranda Series issued by Revenue Canada and is binding provided that the proposed transactions are completed before XXXXXXXXXX, other than the proposed transactions described in paragraphs 24 to 29.
This ruling is based on the Excise Tax Act in its present form and does not take into account any proposed amendments to the Excise Tax Act or to departmental interpretative policy, which, if enacted, could have an effect on the ruling provided herein.
Nothing in this letter should be construed as confirmation that Revenue Canada has reviewed or accepted:
(a) any tax consequences arising from the facts or proposed transactions described herein other than those specifically confirmed in the rulings given;
(b) the adjusted cost base or the fair market value of any property described herein: or
(c) the amount of non-capital losses of any corporation described herein
Yours truly,
XXXXXXXXXX XXXXXXXXXX
Director General Director General
Income Tax Rulings and GSTIHST Rulings and
Interpretations Directorate Interpretations
Directorate
Policy and Legislation Branch Policy and Legislation
Branch
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© Her Majesty the Queen in Right of Canada, 1999
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© Sa Majesté la Reine du Chef du Canada, 1999
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