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: Whether the replacement property rules can be used in the situation where the former business will be operated under a "license of occupation" by a related corporation for a short period. The reason for this arrangement is so that the purchaser of the former business has a tenant while it completes transactions to acquire other nearby properties.
Position: Yes.
Reasons: The rules in section 44 do not prohibit this type of arrangement. In fact, the replacement property rules explicitly allow a taxpayer to dispose of farm property directly to a child [subsection 44(1.1)].
XXXXXXXXXX
XXXXXXXXXX 3-991263
XXXXXXXXXX
XXXXXXXXXX, 1999
Dear XXXXXXXXXX:
Re: XXXXXXXXXX (XCO)
XXXXXXXXXX (YCO)
Advance Income Tax Ruling
We are writing in response your letter dated XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of the above-mentioned taxpayers. We also acknowledge receipt of your correspondence dated XXXXXXXXXX, and the information provided during our telephone conversations.
To the best of your knowledge, and that of the taxpayers involved, none of the issues contained herein is:
i. in an earlier return of the taxpayers or a related person;
ii. currently being considered by a tax services office or a tax centre in connection with a filed tax return of the taxpayers or a related person;
iii. under objection by the taxpayers or a related person;
iv. before the courts, or
v. the subject of a ruling previously issued by the Directorate.
Our understanding of the facts, the proposed transactions, and the purpose of the proposed transactions is as follows:
Facts
1. The issued share capital of XCO is as follows:
XXXXXXXXXX (Mr. A) 1 Class A voting share
XXXXXXXXXX (Mrs. A) 1 Class A voting share
2. The issued share capital of YCO is as follows:
Mr. A XXXXXXX Class A voting shares
XXXXXXX Class C non-voting shares
Mrs. A XXXXXXX Class A voting shares
1 Class B non-voting shares
3. XCO and YCO (referred to hereinafter as the "taxpayers") are associated with, and related to, each other.
4. XCO holds a lease (the leasehold interest in the site property) with XXXXXXXXXX for land and a building (referred to hereinafter as the "site property") at XXXXXXXXXX. The lease began XXXXXXXXXX.
5. XCO in turn, leases the site property to YCO, which operates a XXXXXXXXXX on the site property.
6. The site property is comprised of a total of XXXXXXXXXX square feet, and is leased entirely to YCO.
7. Of this total area, YCO used XXXXXXXXXX square feet or XXXXXXXXXX% directly in the operation of the XXXXXXXXXX. The remaining XXXXXXXXXX square feet are used for staff accommodation, XXXXXXXXXX.
Proposed Transactions
8. XCO will sell its leasehold interest in the site property and the goodwill, and YCO will sell its goodwill and certain other capital properties to XXXXXXXXXX.
9. In return for surrendering the properties to XXXXXXXXXX, the taxpayers will receive the following consideration:
XCO:
Leasehold interest in land and building $ XXXXXXXXXX
Goodwill XXXXXXXXXX
Total $ XXXXXXXXXX
YCO:
Equipment $ XXXXXXXXXX
Paving XXXXXXXXXX
Leasehold improvements XXXXXXXXXX
Goodwill XXXXXXXXXX
Total $ XXXXXXXXXX
10.
XXXXXXXXXX
11. In the interim XXXXXXXXXX proposes to issue a license of occupation to operate a XXXXXXXXXX on the site property to a nominated corporation (the "nominee").
12. The taxpayers have been granted the right to choose the nominee.
13. The taxpayers intend to nominate a corporation which will be XXXXXXXXXX% owned by XXXXXXXXXX (Mr. B) , who is the son of Mr. and Mrs. A.
14. Mr. B is XXXXXXXXXX years of age. He has a university degree and has worked in his parents' business previously.
15. The license of occupation will be for a period of XXXXXXXXXX years. However, XXXXXXXXXX has the right under the agreement to terminate the license after XXXXXXXXXX years upon giving XXXXXXXXXX notice.
16. According to article XXXXXXXXXX of Schedule "A" of the proposed License of Occupation Agreement, there will not be a transfer of any exclusive possessory or leasehold interest to the nominee.
17. The nominee will pay a rate of $XXXXXXXXXX per month for the license.
18. As a separate transaction, the nominee will acquire the XXXXXXXXXX inventory from YCO at wholesale cost (XXXXXXXXXX).
19. The taxpayers propose to acquire new properties and utilise the replacement property rules to the extent permitted by the Income Tax Act (the Act).
Purpose of the Proposed Transactions
The purpose of the proposed transactions is to surrender XCO's leasehold interest in the site property and related goodwill, along with the business of YCO to XXXXXXXXXX. XXXXXXXXXX wants the nominee to continue to operate the XXXXXXXXXX at the site property under a license of occupation agreement, in order to provide XXXXXXXXXX with a tenant while the acquisition of other surrounding properties is undertaken.
Rulings Requested and Given
Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions, and purpose of the proposed transactions, and the proposed transactions are completed as described above, we confirm the following:
A. XCO's leasehold interest in the site property will qualify as "former business property" within the meaning of section 248(1), and, accordingly, the rules in subsection 44(1) of the Act will apply on the acquisition of a capital property that is a replacement property for the former business property.
B. The provisions of subsection 14(6) of the Act will apply to XCO and YCO on the acquisition of an eligible capital property that is a replacement of the goodwill sold to the extent provided thereunder.
C. Subsection 245(2) of the Act will not be applied as the result of the proposed transactions, in and of themselves, to redetermine the tax consequences described herein.
The rulings provided herein are subject to the limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996 and are binding on Revenue Canada provided that the site property is sold to XXXXXXXXXX by XXXXXXXXXX. These rulings are based on the law as it presently reads and do not take into account any proposed amendments to the Act which, if enacted into law, could have an effect on the rulings provided herein.
Yours truly,
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
5
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