15 April 1987 Income Tax Severed Letter RCT 5-2850 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 XXX:

This is in reply to your letter of February 4, 1987 concerning:

a) the date of disposition of property for purposes of subsections 85(1) and (2) of the Income Tax Act (the "Act") on incorporation of a farming business carried on as a proprietorship and partnership, respectively, and

b) whether the redemption of the special shares received as consideration by the transferors would result in a capital gain or a dividend considering the effects of subsections 85(2.1) and 245(1.1), and section 247 of the Act on the transactions.

You have indicated that the property transferred to the corporation consists of cattle, feed and equipment used in the farming business by the transferors.

This office issues advance income tax rulings with respect to the tax implications of contemplated transactions. Please, refer to Information Circular 70-6R. Opinions as to the tax implications of completed transactions may be obtained from the local district taxation office provided, of course, complete details of the transactions are disclosed. Since the situations to which you refer in your letter concern actual completed transactions, any opinion request with respect to their tax consequences should be directed to the local district office. Nevertheless, we are prepared to make the following general, non-binding comments.

The common factor in the situations you had described is that the property disposed of was intended to be transferred to the corporation on a particular date but the "legal work" was completed quite some time after the particular date. Since the application dates of subsections 85(2.1) (as amended), 245(1.1) and 247(1) (as amended) of the Act intervene the particular date and the date the legal work was completed, you are asking whether the mentioned tax provisions would apply in the circumstances you have described. The implication is that if the date of transfer of the property to the corporation is considered to be the date when the legal work was completed, the above tax provisions are either automatically applicable (subsection 85(2.1)) or may reasonably be considered to apply (subsections 245(1.1) and 247(1)) with the result that the redemption of the special shares consideration will give rise to

i) an amount being included in income either as a taxable dividend or as property income, other than a taxable dividend, (subsections 247(1) or 85(2.1)) or

ii) the taxable capital gains otherwise realized being denied the deduction under section 110.6 of the Act (subsection 245(1.1)).

Generally, a disposition takes place when the parties intend it to take place and this would normally be reflected in the contracts or other documents. Where specific dates may be significant, it may be necessary to determine if the transaction did in fact take place at the time indicated in the contracts. This determination would be done by reference to other facts surrounding the transacton. If the transaction was a roll-over of a business and business property to a corporation, some of the relevant questions are: was the corporation in existence at the particular time? In whose name were the banking transactions carried on? If the property transferred was insured, when was the insurance company notified of the change in ownership? When were suppliers and customers advised of the change in ownership? When were such agencies as control motor vehicle registration, land registration and taxes, government rights etc. notified of the change in ownership? When was the lawyer instructed to prepare the documents? The answer to these types of questions would give some idea of how to substantiate when a transaction takes place in situations where a specific date is critical.

We are enclosing the following Departmental publications which you may find of assistance in determining on what date the transferors in your situations transferred the property to their corporations:

Interpretation Bulletin IT-170R "Sale of Property - When Included in Income Computation"

Interpretation Bulletin IT-220R "Capital Cost Allowance - Proceeds of Disposition of Depreciable Property"

Interpretation Bulletin IT-460 "Dispositions - Absence of Consideration"

Interpretation Bulletin IT-50R "Capital Cost Allowance - of Acquisition of Depreciable Property"

As regards the application of subsections 245(1.1), 247(1) and 85(2.1) of the Act, we have the following additional comments to make.

The application of subsections 245(1.1) and 247(1) depends on the determination of whether the "purpose test" imposed in the respective provisions is satisfied. In our view, this determination is a question of fact being based on a review of the complete transactions including their documentation and the surrounding circumstances. General comments concerning the application of these tax provisions are found in the "Technical Notes" issued by the Department of Finance when the draft legislation affecting the above tax provisions was released. For your reference, we are attaching a copy of the relevant portions of the Technical Notes covering subsections 245(1.1) and 247(1) as well as subsection 85(2.1) of the Act.

Subsection 85(2.1) of the Act does not contain a "purpose test" but applies automatically if the disposition to the corporation, on a rollover basis under subsections 85(1) and (2) of the Act, occurs after November 21, 1985. Since the reduction in the paid-up capital provided by subsection 85(2.1) of the Act is designed to create a deemed dividend on redemption of the shares, if you determine that the disposition of property in the situations you have described is after November 21, 1985, the redemption of the special shares may give rise to a deemed dividend under section 84 of the Act.

We regret that we could not be of more assistance with respect to your request. We trust, however, that the above comments and the material enclosed will be useful.