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.
RE: Subsection 44(1)Subsection 85(1)Section 248- "former business property"
Problem:
A Co. Ltd., a wholly-owned subsidiary of a E Co. Ltd., a large Canadian Retail Sales Company was incorporated to hold all of the real property of E Co.
A Co. Ltd. proposes to roll the specific real property, i.e. a retail store which it owns in Edmonton, Alberta to a newly incorporated sister corporation under Section 85 and to subsequently wind-up under Section 88 this company into E Co.
E Co. proposes to use the real property in its operations for approximately two years while it builds a new retail store and avail itself of the provisions of Section 44.
Results:
The taxpayer has effectively avoided the capital gain taxes on his original property.
Decision:
Provided that the property is used in the business for the purpose of gaining or producing income from the business of E Co., notwithstanding the property is used only for a short period of time we will allow the taxpayer the benefit of Section 44.
The period on time in which the capital property is used in the business will not be commented upon in the Advance Ruling itself but we will state that the capital property must however be used in the business.
Finally, if the taxpayer insists on stating as a fact in the A/R that he intends to roll the new capital property or replacement property immediately back to A Co. Ltd. we will issue the Advance Ruling on the grounds that the transactions are a series of transactions designed primarily to avoid income taxes.
We are aware of the concerns expressed in your letter, that such a position could jeopardize the existence of the family farm corporation if the freezor wished to freeze such a corporation and to pass the freeze shares on his death to his children who did not participate in the farm operations.
However, to date we have not been made aware of an acceptable alternative for rights and conditions attaching to freeze shares to maintain their value both before and after death.
The solution you suggest in your letter in our opinion does not represent an acceptable alternative for the following reasons:
(a) The loss of retractability on death replaced by serial redemption over a period of not exceeding 15 to 20 years would cause a significant reduction in the value of the freeze shares (e.g. the present value of $1,000 received 15 or 20 years from now is significantly less than $1,000).
(b) When the freeze shares are valued at a point in time all the rights and conditions attaching to those shares at that time must be taken into account and the loss of retractability on death as set out in paragraph (a) above would detract from the value of the freeze shares in the hands of the freezor before his death.
(c) The loss in value as set out in paragraphs (a) and (b) above would pass on to the common shareholders (the persons in whose favour the freeze was made) and it would appear that there would be problems with the conveyance of benefits at the time of the freeze.
(d) The rollover rules provided in subsection 70(9.2) of Income Tax Act do nothing to assist us in solving the problem of maintaining the value of the freeze shares both before and after death.
(e) It is not clear what our position would be if on the loss of retractability the present value of the freeze shares was less than their adjusted cost base.
(f) Depending upon the present value of the freeze shares on death the freezor may not be treating all his children equally.
(g) Even the addition of a preferential cumulative dividend does not necessarily maintain the value of the freeze shares because the risk of investing the principle for such a long period of time would have to be considered but such a feature would add more value to the freeze shares.
In view of the valuation problem the Department will continue to follow its present practice with respect to the rights and conditions which must be attached to freeze shares when the retractability feature is lost on death.
We trust this information will be of assistance to you.
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© Sa Majesté la Reine du Chef du Canada, 1981
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