27 March 1986 Income Tax Severed Letter RCT 5-0285 F

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.

Dear Sirs:

This is in reply to your letter of December 12, 1985 in which you sought confirmation of your understanding of our position regarding the application of the provisions of paragraph 15(1)(c) and 85(1)(e.2) when assets are transferred between sister corporations for consideration that has a value less than the fair market value of the assets transferred.

Favourable advance income tax rulings have been issued in respect of proposed transactions which comply with the following guidelines:

1. The transferor and transferee are beneficially and ultimately owned in identical proportions by the same shareholders, provided that the shares of the transferor are not widely held.

2. The capital gain that would have been realized on a sale of the common shares of the transferor at fair market value immediately before the transfer is reduced by the portion of that gain that is attributable to the unrealized gain inherent in the property to be transferred (the "transfer property"). The amount of this reduction should increase the capital gain that would be realized on a sale of the shares of the transferee corporation at fair market value immediately after the transfer.

3. When no significant purchase of shares of the transferor has occurred since the transferor acquired the transfer property, the value of the consideration on the transfer should equal the adjusted cost base of the transfer property.

If the transfer property was acquired before January 1, 1972, the consideration should equal the V-Day value of the transfer property. If capital cost allowance has been claimed on the transfer property and if this allowance has not contributed to losses in the transferor, then the consideration otherwise determined may be reduced by the allowance claimed.

4. Is the assumption of a liability on purchase of livestock inventory included in non-share consideration?

It is a question of fact whether the transferor has received the amount of the liability. For example, if the creditor discharged the transferor from his obligation to pay the amount in favour of the transferee and the transferee assumed the obligation, in our opinion, the transferor would have received the amount of the liability for the purposes of paragraph 28(1)(a). If the transferor remains liable for payment of the obligation, regardless of the fact that the transferee may be equally liable, a reasonable argument could be made that the transferor has not received the proceeds of disposition nor paid the liability. The extent of receipt and payment under subsection 28(1) would depend on whether the transferor remains liable for the debt, or any portion thereof, after the liability has been assumed by the transferee. The comments contained in paragraph 9 of IT-433 would appear to be relevant.

5. A taxpayer has a prior year restricted farm loss carry-forward and, using a subsection 85(1) election, he takes back a promissory note as non-share consideration equal to the losses. Has the transferor received the amount or do you reverse the income and let the losses expire? The comments regarding receipt and promissory notes contained in paragraphs 1 and 2 above should again be noted.

We trust the above will be of assistance.