9 August 2010 Internal T.I. 2010-0366821I7 - Application of s. 160(1) to Assumption of Contract

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.

Principal Issues: Whether a contract is property for the purposes of s.160.

Position: Yes.

Reasons: Subsection 248(1) defines property broadly to mean property of any kind whatever whether personal or incorporeal

		August 9, 2010

	Kitchener / Waterloo TSO				HEADQUARTERS
	Appeals Division						Income Tax Rulings
		  								Directorate
	Attention:	Ms Carolyn Kropf				Richard Aronoff
		Team Leader						(613) 941-7239

									2010-036682

Application of 160(1) to the Assumption of a Contract

This is further to John Stuber's email of April 15, 2010, wherein he requested an interpretation as to whether subsection 160(1) of the Income Tax Act applies where a successor corporation assumes, for no consideration, a contract held by a predecessor corporation while the latter was indebted for tax.

A company that supplied XXXXXXXXXX services had an unpaid tax debt. The director who controlled the company started a new company that he also controlled as its director. The successor company assumed a significant contract from the predecessor company and proceeded to provide the XXXXXXXXXX services to the same customers using the same equipment. The value of the remaining three to four years of the contract was appraised at 55% of the annual gross income the contract generated.

The rights and obligations associated with the contract fall within the definition of property in subsection 248(1), which defines "property" to mean property of any kind whatever whether real or personal or corporeal or incorporeal and, without restricting the generality of the foregoing, to include:

(a) a right of any kind whatever, a share or a chose in action,

(b) unless a contrary intention is evident, money,

(c) a timber resource property, and

(d) the work in progress of a business that is a profession.

Various methods are used by appraisers and valuators to determine the value of a business or property. Given the limited facts, it is beyond the scope of this interpretation to comment on the methodology used to value the contract.

Paragraph 251(1)(a) provides that related persons are deemed not to deal with each other at arm's length and subparagraph 251(2)(c)(i) provides that any two corporations are related where they are controlled by the same person. From the facts, the predecessor and successor companies are deemed not to deal with each other at arm's length.

Since the transfer of the contract was between two companies that were not dealing at arm's length, both companies are jointly and severally liable under subsection 160(1) to pay an amount equal to the lesser of:

• the amount by which the fair market value of the property at the time it was transferred exceeds the fair market value at that time of the consideration given for the property, and;
• the total of all amounts each of which is an amount that the transferor is liable to pay under this Act in or in respect of the taxation year in which the property was transferred or any preceding taxation year.

Should you have any questions or require clarification, please do not hesitate to contact Richard Aronoff at the number provided above.

B.J. Skulski
Manager
Insolvency and Administrative Law Section
Income Tax Rulings Directorate

c.c. John Stuber
Appeals Officer
Kitchener / Waterloo TSO