Translation disclaimer
This translation was prepared by Tax Interpretations Inc. The CRA did not issue this document in the language in which it now appears, and is not responsible for any errors in its translation that might impact a reader’s understanding of it or the position(s) taken therein. See also the general Disclaimer below.
Principal Issues: Whether, in a particular situation where a corporation ("Holdco 1") would dispose of its rights in a building in favour of another corporation ("Opco B") and on the assumption that no corporation would be controlled in fact by a person or group of persons, subsection 13(21.2) of the Act would apply.
Position: No. Holdco 1 and Opco B would not be affiliated with each other at any given time. Consequently and subject, among other things, to the application of subsection 13(21.1), the disposition of the building would give rise to a terminal loss for Holdco 1 pursuant to subsection 20(16) of the Act.
Reasons: Wording of the Act.
2003-001155
XXXXXXXXXX S. Prud'Homme
(613) 957-8975
April 9, 2003Dear Sir,
Subject: Request for a Technical Interpretation regarding the Application of Section 251.1 and Subsection 13(21.2) of the Income Tax Act
This is in response to your letter of April 1, 2003, in which you requested our opinion regarding the application of section 251.1 and subsection 13(21.2) of the Income Tax Act (the "Act") in a particular situation. Unless otherwise indicated, all statutory references herein are to provisions of the Act.
It appears to us that the situation described in your letter and summarized below may be an actual situation involving taxpayers. As explained in Information Circular 70-6R5, it is not the practice of this Directorate to provide comments on proposed transactions involving specific taxpayers otherwise than in the form of an advance income tax ruling. If your situation involved specific taxpayers and one or more completed transactions, you should submit all relevant facts and documentation to the appropriate Tax Services Office for its opinion. However, we are able to offer the following general comments that may be helpful. It should be noted that the application of one or more provisions of the Act generally requires an analysis of all the facts relating to a particular situation. Accordingly, and given that your letter only briefly describes a hypothetical situation, the comments we provide below may not be fully applicable in a particular situation.
1) Particular Situation
You have presented us with the situation described below (the "Particular Situation") as part of your request for a technical interpretation.
a) A corporation ("Opco A") held, as nominee, an immovable (comprising a building and the subjacent land) for and on behalf of two other corporations ("Holdco 1" and "Holdco 2"). Holdco A was a "Canadian-controlled private corporation" within the meaning of the definition in subsection 125(7).
We therefore understand that Holdco 1 and Holdco 2 were, as a matter of law, co-owners of the building and that Opco A acted as agent for Holdco 1 and Holdco 2 in respect of the building. No partnership whose partners were Holdco 1 and Holdco 2 legally existed in the Particular Situation.
Holdco 1 and Holdco 2 held 33.33% and 66.67% respectively of the issued and outstanding shares of the capital stock of Opco A. Those shares of Opco A had a fair market value of $100.
b) Holdco 1's and Holdco 2's undivided interests in the building were 33.33% and 66.67%, respectively. Immediately prior to the disposition of the building described below, the principal tax attributes of the building to each of the co-owners were as follows:
For Holdco 1: Fair market value: $278,000
Capital cost: $1,433,333
Undepreciated capital cost: $730,000
For Holdco 2: Fair market value: $556,000
Capital cost: $2,866,667
Undepreciated capital cost: $1,460,000
Each of the interest holders included their undivided interests in the building in Class 1 of Schedule II of the Income Tax Regulations for capital cost allowance purposes. For each of the co-owners, those interests in the building were the only property included in that capital cost allowance class.
c) Two individuals ("Mr. A" and "Mr. B") each owned 50% of the issued and outstanding shares of the capital stock of Holdco 1. Holdco 1 was a "Canadian-controlled private corporation" as defined in subsection 125(7).
Another individual ("Mr. C") held all of the issued and outstanding shares of the capital stock of Holdco 2. Holdco 2 was a "Canadian-controlled private corporation" as defined in subsection 125(7).
Messrs. A, B and C were not related persons within the meaning of subsection 251(2).
(d) The wives of Messrs. A, B and C ("Mesdames A, B and C") held all of the issued and outstanding shares of the capital stock of another corporation ("Opco B"). Specifically, Ms. A and Ms. B each held 25% of the issued and outstanding shares of the capital stock of Opco B, while Ms. C held 50% of the issued and outstanding shares of that capital stock. Opco B was a "Canadian-controlled private corporation" as defined in subsection 125(7).
Ms. A, Ms. B and Ms. C were not be related to each other within the meaning of subsection 251(2).
Further, we have assumed for the purposes of this letter that none of the above individuals was related to any other of the above individuals within the meaning of subsection 251(2), except of course for the individual’s spouse, who would be related by reason of the relationship of marriage between them (paragraphs 251(2)(a) and 251(6)(a)).
e) As agent, Opco A disposed of, for and on behalf of Holdco 1 and Holdco 2, the above real property to Opco B. Specifically, Opco A disposed of, for and on behalf of Holdco 1 and Holdco 2, the building to Opco B for a consideration equal to the fair market value of such building, namely $834,000. Holdco 1 and Holdco 2 received $278,000 and $556,000, respectively, in that regard. The consideration for which the subjacent land was disposed of is not indicated in your letter.
Holdco 1 and Holdco 2 also disposed of all of their shares of the capital stock of Opco A to Opco B for a consideration equal to the fair market value of those shares, i.e. $100.
f) For the purposes of this letter, you asked us to consider that no person or group of persons had de facto control over any of the above corporations. We therefore understand that you wish to have the Particular Situation analyzed solely on the basis of the concept of de jure control at the level of the corporations concerned.
2) Your Comments on the Particular Situation
You are of the view that Holdco 1 would sustain a terminal loss in the amount of $452,000 ($730,000 - $278,000) as a result of the disposition of the building described above pursuant to subsection 20(16).
You are also of the view that the provisions of subsection 13(21.2) would not apply in the circumstances since at no relevant time were Holdco 1 and Opco B affiliated with each other within the meaning of subsection 251.1(1).
3) Your Question regarding the Particular Situation
You would like us to confirm or deny your analysis summarized above.
4) Our Comments on the Particular Situation
You indicated that, in the Particular Situation, Opco A held the property as nominee, for and on behalf of Holdco 1 and Holdco 2. We understand that in civil law, the nominee contract is a lawful form of agency. Generally, the Canada Customs and Revenue Agency ("CCRA") will accept for tax purposes an agency relationship between persons provided that:
- the relationship between the persons concerned is legally a principal-agent relationship; this implies, among other things, that the transactions relating to the agency are legally effective and complete;
- the relationship is the result of a prior formal agreement and is not an ex post facto arrangement;
- the relationship does not contravene any legislation;
- the relationship is not a sham;
- the relationship is disclosed to and documented by the CCRA in a timely manner (generally at the time of filing the relevant tax returns);
- the facts of the particular situation support the existence of the principal-agent relationship between the persons concerned.
To the extent that the relationship between Opco A and Holdco 1 is one of principal-agent that satisfies the above conditions, subject to the potential application of section 13(21.1) and to the extent that Holdco 1 would no longer own property in the depreciable class in which the building would have been included at the end of its taxation year in which the building was disposed of, we are of the view that Holdco 1 would have a terminal loss pursuant to subsection 20(16) in the amount of $452,000 as a result of the disposition of the building. Holdco 1 should deduct that terminal loss in computing its income for the year pursuant to paragraph 20(16)(c). In this regard, we are of the view that the provisions of subsection 13(21.2) would not apply in the circumstances since, at any relevant time, Holdco 1 and Opco B would not be affiliated with each other within the meaning of subsection 251.1(1). In particular, it appears that Ms. C, one of the members of the group of persons controlling Opco B, would not be affiliated with at least one member of the group of persons controlling Holdco 1 (i.e., Messrs. A and B). However, depending on, among other things, the fair market value of the subjacent land, the provisions of subsection 13(21.1) could apply in the particular situation to deem the proceeds of disposition in respect of the building to be different from those referred to in Section 1 above). This could therefore have the effect of reducing or even eliminating the terminal loss otherwise sustained by Holdco 1.
Please note that this opinion is not an advance ruling and, as stated in paragraph 22 of Information Circular 70-6R5 of May 17, 2002, it is not binding on the CCRA with respect to any particular factual situation.
We hope that our comments will be helpful to you.
Maurice Bisson, CGA
for the Director
Corporate Reorganizations and Resource Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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