17 December 1999 External T.I. 9927015 - DETERMINABLE PROPERTY

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 common shares not exceeding 50% interest in the purchaser; non-voting redeemable and retractable special shares that do not give vendor de facto control of purchaser; or debt taken back by the vendor for a fixed amount that would not be varied depending on the proceeds from sale of property would be considered to be property determinable primarily by reference to the fmv of the particular property.

Position: No.

Reasons: Consistent with views expressed in Technical Notes on subparagraph 88(1)(c.3)(ii)

XXXXXXXXXX 5-992701
J. Teixeira
(613) 957-2095
Attention: XXXXXXXXXX

December 17, 1999

Dear Sir:

Re: Technical Interpretation Request
subparagraph 88(1)(c.3)(ii)¹

We are writing in response to your letter of August 9, 1999, wherein you requested our opinion concerning the interpretation of subparagraph 88(1)(c.3)(ii) to a certain situation described in your letter.

The situation described in your letter is as follows:

1. The vendor is an individual ("Vendor") who owns a family farm corporation ("Targetco"). Targetco has land which is a capital property with a high fair market value and relatively low adjusted cost base. Vendor wishes to sell the shares of Targetco and claim his capital gains deduction.

2. The purchaser is a land developer who wishes to acquire the land for development. Purchaser incorporates a new corporation ("Purchaseco") to acquire all the shares of Targetco. Following the acquisition of Targetco, Purchaseco will wind up Targetco and wishes to "bump" the cost of the land held in Targetco pursuant to paragraph 88(1)(c).

3. Purchaseco will pay to Vendor an initial amount on closing of 25% to 50% of the value of Targetco and the balance of the purchase price will be paid in phases as the project proceeds or at certain agreed on milestones along the development.

4. Vendor may be offered a variety of consideration for the balance of the purchase price including, common shares, preferred redeemable shares and/or debt in Purchaseco with a mortgage registered against the property as security.

You have asked whether, in the above example, assuming all the participants are arm's length parties and neither party has any direct or indirect influence over the other party which would constitute de facto control, the following would be considered to be property determinable primarily by reference to the fair market value of, or to any proceeds from a disposition of, property acquired by a person in substitution for particular property distributed to the parent on the winding-up of a subsidiary ("determinable property") for the purposes of subparagraph 88(1)(c.3)(ii):

1. common shares in Purchaseco providing such share interest did not exceed a 50% interest and that the Vendor does not otherwise control Purchaseco;

2. non-voting, redeemable and retractable special shares in Purchaseco, provided that such shares did not give Vendor de facto control of Purchaseco; or

3. debt of Purchaseco secured by the land formerly owned by Targetco. The debt would be for a fixed amount that would not be varied depending on the proceeds from the sale of the land.

Our Comments

Provided that the value of the shares or debt is not dependent on or does not track the proceeds from disposition of the land, it is our opinion that such shares or debt would not generally be determinable property and paragraph 88(1)(c.3) would not apply to the situation described above.

The above comments represent our general views with respect to the subject matter of your letter of August 9, 1999. As indicated in paragraph 22 of Information Circular

70-6R3, this is not an income tax ruling and is therefore not binding on the Canada Customs and Revenue Agency.

Yours truly,

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

¹ Income Tax Act, RSC 1985, c.1 (5th Supp.), as amended (herein referred to as the "Act"). Unless otherwise stated, statutory references in this letter are to the Act.