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:
1. Is interest payable on debts used to acquire fixed assets still deductible by the partnership after the transfer to Newco and reacquisition from Newco on wind-up of Newco.
2. In order to cause recapture in the partnership that can be allocated to the partners, the partnership will need a year end prior to the reacquisition of the assets. Is this possible.
3. If this was an asset sale purchaser would put assets in class 43. Proposed transactions have certain assets remain in class 43. Is there a benefit.
Position:
1. Yes
2. Request must be made to the Director of the relevant TSO.
3. Potential benefit. However to avoid the problem, Partnership will acquire class 43 assets before sale of old assets and make an election to have class 29 and 39 become class 43.
Reasons:
1. On the sale to Newco the partnership receives common shares which are considered property used to earn income. On the wind-up of Newco the partnership reacquires the assets which will be used to earn income in the partnership.
2. See It- 179R par. 4
3. Regulation 1103(2d)
XXXXXXXXXX
XXXXXXXXXX 993171
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 1999
Dear Sirs:
Re: Advance Income Tax Ruling Request - XXXXXXXXXX
We are writing with respect to your letter dated XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of XXXXXXXXXX. We also acknowledge your letter dated XXXXXXXXXX and our several telephone conversations.
To the best of your knowledge and that of the parties to the ruling request, no issue involved in this ruling request:
a) is in an earlier return of the taxpayers or a related person,
b) 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,
c) is under objection by the taxpayers or a related person,
d) is before the courts, or
e) is the subject of a ruling previously issued by the Directorate.
Except as otherwise noted, all statutory references in this request for advance income tax rulings are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended (the "Act").
Relevant Facts
1. XXXXXXXXXX was organized as a limited partnership under the laws of XXXXXXXXXX in XXXXXXXXXX pursuant to a partnership agreement dated XXXXXXXXXX, amended and restated as of XXXXXXXXXX is owned equally by XXXXXXXXXX.
XXXXXXXXXX
2. XXXXXXXXXX was incorporated under the laws of XXXXXXXXXX and is owned equally by XXXXXXXXXX is a "taxable Canadian corporation". The term "taxable Canadian corporation", as used here and subsequently, has the meaning assigned by subsection 89(1) of the Act.
3. XXXXXXXXXX is a "taxable Canadian corporation". XXXXXXXXXX is controlled by XXXXXXXXXX has no net capital losses as at its last tax filing.
XXXXXXXXXX
4.
XXXXXXXXXX
5. It is estimated that the fair market value of XXXXXXXXXX depreciable property will be approximately $XXXXXXXXXX and the undepreciated capital cost of such depreciable property will be approximately $XXXXXXXXXX at the time of the proposed transactions described below. It is also estimated that the fair market value of XXXXXXXXXX depreciable property will be in excess of its net book value. More specifically, the fair market value of XXXXXXXXXX depreciable property at the time of the proposed transaction described below will exceed the undepreciated capital cost of such depreciable property by approximately $XXXXXXXXXX depreciable property is included in classes 1, 3 ,6 ,8, 10, 12, 29, 39, and 43.
6. The Amended and Restated Limited Partnership Agreement permits, under certain conditions, the disposition of a partnership interest to a third party. Such a disposition does not result in the dissolution or the termination of the partnership.
XXXXXXXXXX
7. XXXXXXXXXX has actually incurred approximately $XXXXXXXXXX of debt related to the acquisition of its depreciable property. In its fiscal years ending XXXXXXXXXX has deducted, in computing its income for these fiscal periods, the interest paid or payable on the borrowed funds related to the acquisition of its depreciable property in respect of such fiscal years, pursuant to paragraph 20(1)(c) of the Act.
8. XXXXXXXXXX is a taxable Canadian corporation. XXXXXXXXXX is controlled by XXXXXXXXXX has had no taxable income in any of its previous taxation years.
XXXXXXXXXX
9. XXXXXXXXXX deal with each other at arm's length. XXXXXXXXXX deal with each other at arm's length.
Proposed Transactions
Subject to the receipt of a favourable advance income tax ruling, the following transactions will be undertaken:
10. XXXXXXXXXX will acquire two distinct class 43 assets before the end of XXXXXXXXXX fiscal period starting XXXXXXXXXX. Pursuant to subsection 1103(2d) of the Income Tax Regulations, XXXXXXXXXX will elect, in prescribed manner, to transfer all class 29 and 39 assets to class 43.
11. On or after XXXXXXXXXX will transfer at fair market value all or substantially all of its depreciable property to a wholly-owned Canadian corporation ("Newco"). The lands and buildings (other than the buildings situated in XXXXXXXXXX) will not be transferred to Newco.
In consideration for the depreciable property transferred, Newco will:
(a) issue a demand promissory note to XXXXXXXXXX bearing interest at a commercial rate: and
(b) issue common shares to XXXXXXXXXX having a fair market value equal to the fair market value of the depreciable property transferred less the principal amount of the demand promissory note.
Newco is a corporation incorporated under the laws of XXXXXXXXXX and is a taxable Canadian corporation.
12. All of XXXXXXXXXX income (as determined for purposes of the Act) resulting from the disposition of its depreciable property in favour of Newco will be allocated immediately after the said disposition to the partners of XXXXXXXXXX proportionately to their participation in XXXXXXXXXX (i.e. XXXXXXXXXX.). This allocation will be in accordance with the Amended and Restated Limited Partnership Agreement which provides for interim allocations before the end of a fiscal period. No part of XXXXXXXXXX income resulting from the disposition of its depreciable property as described in paragraph 11 above will be allocated to XXXXXXXXXX.
13. XXXXXXXXXX will make application to the Director of the XXXXXXXXXX Tax Services Office to have its fiscal period changed in order that it end at a date that is immediately before the transactions described in paragraph 15 below.
14. Newco will then rent the depreciable property to XXXXXXXXXX for fair market value consideration.
15. After the completion of the transactions described in paragraphs 11 to 14 above and on or after XXXXXXXXXX Newco will be wound-up into XXXXXXXXXX pursuant to subsection 88(2) of the Act.
16. After the completion of the transaction described in paragraph 15 above and on or after XXXXXXXXXX will dispose of its XXXXXXXXXX% partnership interest in XXXXXXXXXX and of its XXXXXXXXXX% interest in XXXXXXXXXX in favour of XXXXXXXXXX for an arm's length cash consideration.
17. At the same time as the proposed transactions described in 16 above, XXXXXXXXXX will dispose of XXXXXXXXXX% of its partnership interest in XXXXXXXXXX and of shares of XXXXXXXXXX representing XXXXXXXXXX% of its capital stock in favour of XXXXXXXXXX for an arm's length cash consideration.
The tax services office of XXXXXXXXXX is XXXXXXXXXX and its taxation centre is XXXXXXXXXX. The tax services office of XXXXXXXXXX is XXXXXXXXXX and its taxation centre is XXXXXXXXXX. The tax services office of XXXXXXXXXX is XXXXXXXXXX and its taxation centre is XXXXXXXXXX.
Purpose of The Proposed Transactions
The purpose of the proposed transactions is to allow XXXXXXXXXX to dispose of its interest in XXXXXXXXXX to an arm's length third party in a manner that will attain the business objectives of both parties.
An arm's length third party would generally want to acquire XXXXXXXXXX assets instead of a partnership interest in XXXXXXXXXX because, among other reasons, it will want to have a tax basis for the underlying assets equal to the purchase price paid.
In the present circumstances, it would be much more difficult, complicated and time consuming, for legal and commercial reasons, for XXXXXXXXXX to proceed with a transfer of assets rather than a transfer of partnership interest. For example, in the case of a transfer of assets, it would also be necessary to obtain authorizations and/or new permits from various governmental bodies (XXXXXXXXXX).
The proposed transactions would permit an increase in the tax basis of XXXXXXXXXX depreciable property and thus make a "partnership interest deal" acceptable to both parties in the transaction.
Rulings Given
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, the proposed transactions and the purposes of the proposed transactions and the proposed transactions are carried out as described herein, and the dispositions of the properties referred to in paragraph 11 above are valid dispositions in law, our rulings are as follows:
A) Subsection 103(1) of the Act will not be applied so as to redetermine the allocation of XXXXXXXXXX income resulting from the disposition of its depreciable property as described in paragraph 11 above.
B) Provided XXXXXXXXXX elects in the manner described in subsection 1103(2d) the Regulations then XXXXXXXXXX will be considered to have transferred all its class 29 and class 39 assets to class 43 before the disposition described in paragraph 11 above.
C) Provided the conditions specified in paragraph 1100(2.2)(g) of the Regulations are satisfied, paragraph 1100(2.2)(h) of the Regulations will apply such that no amount will be included under paragraph 1100(2)(a) of the Regulations in respect of depreciable property that is acquired by XXXXXXXXXX from Newco in the course of the winding-up of Newco, as described in paragraph 15 above.
D) Subsection 1102(14) of the Regulations will apply to the transfer of depreciable property by XXXXXXXXXX to Newco, as described in paragraph 11 above, so that any such property that is property of a prescribed class or a separate prescribed class immediately before the transfer will be deemed to be property of that same prescribed class or separate prescribed class, as the case may be, of Newco.
E) Subsection 1102(14) of the Regulations will apply to the transfer of depreciable property by Newco to XXXXXXXXXX in the course of the winding-up of Newco, as described in paragraph 15 above, so that any such property that is property of a prescribed class or a separate prescribed class immediately before the transfer will be deemed to be property of that same prescribed class or separate prescribed class, as the case may be, of XXXXXXXXXX.
F) Provided that XXXXXXXXXX has a legal obligation to pay interest on the debt described in paragraph 7 above and provided that XXXXXXXXXX depreciable property continues to be held for the purpose of gaining or producing income (other than income which would be exempt), XXXXXXXXXX will be entitled to deduct, in computing its income for a fiscal period, the lesser of the interest paid or payable in respect of that fiscal year or a reasonable amount in respect thereof pursuant to paragraph 20(1)(c) of the Act.
G) Subsection 245(2) of the Act will not be applied as a result of the proposed transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given.
These rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996 and are binding on the Canada Customs and Revenue Agency, provided that the proposed transactions described herein are completed by XXXXXXXXXX.
Our rulings are based on the Act in its present form and do not take into consideration any proposed amendments to the Act. Except as expressly stated, our rulings do not imply acceptance, approval or confirmation of any tax implications of the facts or proposed transactions.
Yours truly,
for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch
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