1999 Ruling 9912543 - REORGANIZATION

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: classification of shares in co-op

Position: can be either investment or business in this situation since transfer is XXxXXXXxXX % of the property so there is no classification problem

Reasons:

xxxxxxxxxx
xxxxxxxxxx 3-991254
xxxxxxxxxx

Attention: xxxxxxxxxx

xxxxxxxxxx, 1999

Dear Sirs:

Re: Advance income tax ruling
xxxxxxxxxx

We are writing in response to your letters of xxxxxxxxxx wherein you requested an advance income tax ruling in respect of the above taxpayer.

To the best of your knowledge, and that of the parties to this ruling, none of the issues contained in this advance income tax ruling:

1. is in an earlier return of the taxpayer or a related person;

2. is being considered by a tax services office or a taxation centre in connection with a previously filed tax return of the taxpayer or a related person;

3. is under objection by the taxpayer or a related person;

4. is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; or

5. is the subject of a ruling previously issued by this Directorate.

Unless otherwise stated all references to a statute are to the Income Tax Act (Canada), R.S.C. 1985 (5th Supp), C. 1, as amended, (the 4'Act").

Facts

1. xxxxxxxxxx is a family farm corporation and is owned equally xxxxxxxxxx.

2. xxxxxxxxxx are brothers who purchased the original xxxxxxxxxx farm from their father in XXXXXXXXXX are resident in Canada.

3. XXXXXXXxxx was incorporated under the laws of the Province of XXXXXXXXXX in XXXXXXXXXX. It is a Canadian-controlled private corporation (44CCPC") and a taxable Canadian corporation ("TCC") which, as used here and subsequently, have the meanings assigned by subsections 125(7) and 89(1), respectively.

4. xxxxxxxxxx reports income from its farming business in accordance with the 44cash method" as described in subsection28(1).

5. XXXXXxXXXx was incorporated in XXXXxXXXXX under the laws of the Province of xxxxxxxxxx and the existing farm assets (land, buildings, xxxxxxxxxx, equipment and XXXXXXXXXx) were transferred to xxxxxxxxxx pursuant to subsection 85(2). Each brother received xxxxxxxxxx redeemable preferred shares with a par value of $XXXXXXXXXX each and a redemption value of $XXXXXXXXXX per share. Each brother owns xxxXxxxxxx voting common shares. All of the above shares are held by their holder as capital property which, as used here and subsequently, has the meaning assigned by section 54. There are no other shareholders of xxxxxxxxxx.

6. In XXXXXXXxxx acquired a second xxxxxxxxxx farm which was used in the business of farming until XXXXXXXXXX.

7. In xxXXXXXxxx sold the second xxxxxXXxxx farm as a result of an unsolicited offer from an arm's length party. xxxxxxxxxx realized a capital gain of approximately $XXXXXXXXXX. This sale was not undertaken in contemplation of the proposed transactions described below.

8. xxxxxxxxxx then purchased an existing xxXXxxxXXX farm and elected to use subsection 44(1) to defer the recognition of the capital gain on the disposition of the second XXXXxXXXXX farm.

9. The farming properties of xxxxxxxxxx include land, buildings, machinery, equipment, livestock, feed, cash, accounts receivable and patronage reserves. Included in the farming properties are the personal residences of xxxxxxxxxx.

1O. Each of the brothers has from time to time advanced funds to XXxxxxxxxx by way of shareholder loans. At present, the shareholder loans owing by xxxxxxxxxx are as follows: xxxxxxxxxx.

Included in xxxxxxxxxx liabilities is an amount of $xxxxxxxxxx owing to a Canadian chartered bank.

11. Immediately before the transfers of property described in paragraph 17 below, the assets of XXxxxxxxxx will be classified into three types of property for purposes of paragraph 55(3)(b) as follows:

(a) cash or near-cash property, being the current assets of xxxxxxxxxx including cash, accounts receivable, inventories, and rights arising from the prepayment of certain expenses:

(b) investment property, being all the assets of xxxxxxxxxx, other than cash or near-cash property, any income from which would, for the purposes of the Act, be income from property or a specified investment business including the equity in XXXXXXXXXX; and

(c) business property, being all the assets of xxxxxxxxxx, other than cash or near-cash property and investment property, any income from which would, for purposes of the Act, be income from a business, including all the farm land, buildings, equipment, machinery and xxxxxxxXxx. As it is imperative that xxxxXXxxxx be available to tend the animals all the time, the personal residences which are occupied by xxxxxxxxxx and their families will be considered business property.

12. The term "specified investment business" has the meaning assigned by subsection 125(7).

13. In determining the net fair market value of each type of property of xXxxxxxxxx immediately before the transfers described in paragraph 17 below, the liabilities of Xxxxxxxxxx will be allocated to, and deducted in the calculation of the net fair market value of, each type of property of Xxxxxxxxxx as follows:

(a) Current liabilities of xXxxxxxxxx (including the current portion of long-term debt) will be allocated to cash or near-cash property to the extent of the fair market value of such property.

(b) Liabilities, other than current liabilities, will be first allocated to the specific properties to which they relate, if any, and then to other properties of the same type, to the extent of the net fair market value of that particular type of property.

(c) Excess unallocated liabilities (including current liabilities remaining unallocated after step (a) above), if any, will then be allocated to the cash or near-cash, investment and business property on a pro rata basis, based on the relative net fair market value of each type of property after the allocation of liabilities in accordance with the rules described in steps (a) and (b) above and prior to the allocation of each excess liability.

Proposed Transactions

14. xxxxxxxxxx will incorporate xxxxxxxxxx under the laws of the Province of Xxxxxxxxxx will be a CCPC and a TCC. The share capital of Xxxxxxxxxx will be as follows:

(a) xxxxxxxxxx class A common shares with no par value;

(b) xxxxxxxxxx class B common shares which will be non-voting and with no par value;

(c) XXxxXXXXXX class C preference shares having a par value of $XXXXXXXXXX per share and a redemption and retraction value of $XXXXXXXXXX per share; and

(d) xxxxxxxxxx class D preference shares having a par value of $XXXXXXXXXX per share and a redemption and retraction value of $XXXXXXXXXX per share.

15. xxxxxxxxxx will issue xxxxxxxxxx class A common shares to xxxxxxxxxx.

16. xxxxxxxxxx will transfer, at fair market value, all of his shares in the capital stock of XXXXXXXXXX to XXXXXXXXXX. As sole consideration, XXXXXXXXXX will issue a number of class D preferred shares to XXxxxxxxxx with a redemption amount and a fair market value equal to the fair market value of the transferred shares. In respect of the transfer, XXXXXXXXXX will jointly elect pursuant to subsection 85(1) , in prescribed form and within the time referred to in subsection 85(6), to transfer the shares of XXXXxxXXxx at an amount equal to their adjusted cost base to xxxxxxxxxx immediately before the transfer, which amount will not exceed their fair market value. The terms "adjusted cost base", and "paid-up capital", as used here and subsequently, have the meanings assigned by section 54 and subsection 89(1), respectively.

17. xxxxxxxxxx will transfer, at fair market value, XXXXxXXxXX% of its cash or near-cash, investment and business property to xxxxxxxxxx such that the net fair market value of each type of property so transferred to xxxxxxxxxx will be equal to that proportion of the net fair market value of all the property of XXXXxxxXXx of that type that:

(a) the aggregate fair market value immediately before the transfer of the XXxxxxxxxx shares owned by XXXXXXXXXX;

is of

(b) the aggregate fair market value immediately before the transfer of all the issued shares of the capital stock of xxxxxxxxxx.

As a result, XXXXXXXXXX will have received xXXxXXxxXx% of each type of property of XXXXxxxxxx as described above. As consideration for the property so transferred, xxxxxxxxxx will:

(a) assume xxxxxxxxxx% of the liabilities of xxxxxxxxxx (including the shareholder's loans)

and

(b) issue a number of class C preference shares which will have an aggregate fair market value and an aggregate redemption and retraction value equal to the amount by which the aggregate fair market value of the transferred properties exceeds the aggregate fair market value of the liabilities so assumed.

18. In respect of the transfer described in paragraph 17 above, XXXXXXXXXX will jointly elect pursuant to subsection 85(1), in prescribed form and within the time referred to in subsection 85(6), to transfer each property that is an eligible property, within the meaning of subsection 85(1.1), at an agreed amount which will be equal to:

(a) in the case of capital property (other than depreciable property of a prescribed class), 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 a prescribed class, an amount equal to the least of the amounts described in subparagraphs 85(1)(e)(i), (ii) and (iii);

(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); and

(d) in the case of inventory, the amount described in paragraph 85(1)(c.2).

In each case, the agreed amount will neither exceed the fair market value of the particular property transferred nor be less than the amount of any liabilities assumed by xxxxxxxxxx as consideration for the transfer of such property. The terms "depreciable property", and "eligible capital property" have the meaning assigned by subsection 13(21) and section 54, respectively.

19. xxxxxxxxxx will purchase for cancellation, at fair market value, and redeem, at the aggregate redemption value, all of its common shares and preference shares held by xxxxxxxxxx and will issue, as consideration, a demand non-interest-bearing promissory note having a principal amount and fair market value equal to the total of the fair market value of the common shares so purchased and the aggregate redemption value of the preference shares so redeemed.

20. xxxxxxxxxx will redeem, at the aggregate redemption amount, all of its class C preference shares held by xxxxxxxxxx and will issue, as consideration, a demand non-interest-bearing promissory note having a principal amount and fair market value equal to the aggregate redemption amount of the preference shares so redeemed.

21. The promissory notes issued in paragraphs 19 and 20 above will then be offset and both notes will be cancelled.

22. Immediately after the transfer described in paragraph 17 above, the net fair market value of the property retained by xxxxxxxxxx, determined in the manner described in paragraph 12 above (after allocating and deducting liabilities in the manner described in paragraph 13 above), will be equal to proportion of the net fair market value of all of the property of XXxxxxxxxx, determined in the manner described in paragraph 12 above (after allocating and deducting liabilities in the manner described in paragraph 13 above), immediately before such transfers, that:

(a) the aggregate fair market value, immediately before the transfer, of all the xxxxxxxxxx shares (other than those owned by XXXXXxxxxx)

is of

(b) the aggregate fair market value immediately before the transfer of all the issued shares of the capital stock of xxxxxxxxxx.

Additional Information

23. No assets have been or will be acquired by or disposed of by, and no liabilities have been or will be incurred by xxxxxxxxxx in contemplation of and before the transfer described in paragraph 17 above, except as described herein.

24. Except as described herein, none of the parties Will dispose of any property to an unrelated person as part of a series of transactions that includes the proposed transactions.

25. None of the parties is contemplating an acquisition of control of XXXXXXXxXX or XXXxxxXXXX except as described herein.

26. xxxxxxxxxx does not have any refundable dividend tax on hand, within the meaning of subsection 129(3).

Purpose of the Proposed Transactions

xxxxxxxxxx wish to farm separately so that they may operate their farms in the manner which is appropriate for each of them and to facilitate the timely transition of their farming operations to their respective children.

Rulings Provided

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts and proposed transactions and the purposes of the proposed transactions, we confirm the following:

The provisions of subsection 55(2) will not apply to any dividends resulting from the purchases for cancellation and redemptions described in paragraphs 19 and 20 above by virtue of the application of paragraph 55(3)(b) provided that, as part of the series of transactions or events that includes the proposed transactions described herein, there is no:

1. disposition of property in the circumstances described in subparagraph 55(3.1)(b)(i);

2. acquisition of control in the circumstances described in subparagraph 55(3.1)(b)(ii); or

3. acquisition of property in the circumstances described in paragraphs 55(3.1)(c) or (d)

which has not been described herein and, for greater certainty, subsection 55(3.1) will not apply to deny the application of paragraph 55(3) (b)

The above ruling is based on the Act in its present form and does not take into account any proposed amendments to the Act.

The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996 issued by Revenue Canada and are binding on Revenue Canada provided the proposed transactions described herein are completed by xxxxxxxxxx.

Comments

1. Nothing in this ruling should be construed as implying that Revenue Canada has agreed to or reviewed the determination of the adjusted cost base or fair market value of any property referred to herein.

2. Nothing in this ruling should be construed as implying that Revenue Canada has agreed to or reviewed any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the ruling given above.

3. In the event of a subsequent disposition of any shares of xxxxxxxxxx or xxxxxxxxxx, nothing in this ruling should be construed as implying that the transactions described herein will not, for the purposes of subsection 55(3.1) or paragraph 110.6(7)(a), be considered to be part of a series of transactions or events which includes such subsequent disposition of shares. The phrase series of transactions or events" has the meaning assigned by subsection 248(10).

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch