8 June 1981 Income Tax Severed Letter RCT 85-018

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.

Problem: Transfer of "property" to corporations and subject sale of property by corporation or shares of transfer corporation.

Background Information

As a result of various discussions with the officials of the Department of Finance and my colleagues in this Department, it was agreed that the Department would not attack or endeavour to upset capital property transfers, e.g. depreciable property to non-arm's length persons prior to the sale of the depreciable property to an outsider if the transfer under section 85 was planned to utilize unabsorbed in house losses, etc. in the non-arm's length corporation.

Subsequent to adoption of this administrative position we agreed to permit the roll of capital property to a corporation if it was the intention of the shareholders of oldco, after the transfer of the assets they wanted to retain to newco to sell oldco's shares to an arm's length party. We adopted this policy since it was thought the reasoning of the Ronald K. Fraser case 64 DTC 5224 could not be applied to the transferor corporation.

Finally, the writer announced publicly at various tax conferences, etc. that the Department would not generally apply the reasoning of the Fraser case if a taxpayer availed himself of section 85 to transfer capital property to a new corporation and subsequently sold the shares of the new company if the transferred property was truly capital property.

During the past months taxpayers have endeavoured to extend and/or expand our administrative positions so that it is now deemed necessary to summarize and record our administrative positions with respect to the transfer of property to corporations:

• 1. The roll of capital property (with or without a potential recapture of capital cost allowance) in accordance with section 85 and the subsequent sale of the shares of newco.

POSITION: The Department will not try to invoke the reasoning of the Fraser case and tax the proceeds of the sale as an income gain.

• 2. The roll of a complete business operation, e.g. a division branch, etc. with or without inventory (other than land) or resource properties, and the subsequent sale of newco shares.

POSITION: The gain or loss on the sale of the newco shares will be treated as a capital gain or loss.

• 3. The roll of inventory (other than land) or resource properties to newco.

POSITION: The roll will be permitted provided the taxpayer undertakes in the advance ruling that the shares of newco will not be sold in the foreseeable future. If the taxpayer is unwilling to commit himself we should refuse to rule and advise him that the Department may endeavour to apply the reasoning of the Fraser case to the subsequent gain. (Note - We may have a problem, however, if the inventory or resource properties are left in the old company and only the property not wanted by the buyer is rolled to newco. If the taxpayer proposes this practice a favourable ruling should be given.)

Finally, it will be necessary for all rulings officers when reviewing an advance ruling request within the parameters of this position paper to ensure that (i) proper consideration (including the value of shares) is received by the transferor for the properties rolled and, in the case of transfers by public corporations fair market consderation is received and (ii) no unreasonable or illogical bumps are obtained by the taxpayer. The effects of contributions of capital or the assumption of debt, etc. by the taxpayers in question should be clearly verified and examined.

With respect to non-resident taxpayers' undertaking to utilize Article VIII of the U.S./Canada Tax Convention we should refuse to rule if the main purpose of the roll is to gain or achieve the benefits of this article which was not available to the taxpayer prior to the reorganization, etc.