2001 Ruling 2000-0038973 - Disposition of Property

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: Does a court order which declares that a person has held property in trust since the property was acquired by that person result in a disposition of that property?

Position: Court order does not result in a disposition of property
REASON: No change of beneficial ownership

XXXXXXXXXX 		2000-003897

XXXXXXXXXX, 2001

Dear XXXXXXXXXX:

Re: XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Advance Income Tax Ruling

We are writing in response to your letter of XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above-noted taxpayers. We acknowledge receipt of your correspondence dated XXXXXXXXXX and the information provided to us during our telephone conversations.

To the best of your knowledge, and that of the taxpayers involved, none of the issues contained herein is:

(i) dealt with in an earlier return of the taxpayers or a related person;

(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayers or a related person;

(iii) under objection by the taxpayers or a related person; or

(iv) before the courts or, if a judgement has been issued, the time limit for appeal to a higher court has not expired.

In this letter, the following terms have the meanings specified:

(a) "Act" means the Income Tax Act, R.S.C. 1985, c.1 (5th Supp.), as amended to the date hereof, and, unless otherwise stated, every statutory reference herein to a section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Act;

(b) "adjusted cost base" has the meaning assigned by section 54;

(c) "BCA" means the Company Act (XXXXXXXXXX);

(d) "Court" means the Supreme Court of XXXXXXXXXX;

(e) "paid-up capital" has the meaning assigned by subsection 89(1);

(f) "personal use property" has the meaning assigned by section 54;

(g) "private corporation" has the meaning assigned by subsection 89(1);

(h) "Realco" means XXXXXXXXXX;

(i) "Share Exchange" means the exchange of Class A Shares of Realco for Class C through J Shares, as described in paragraph 16; and

(j) "taxable Canadian corporation" has the meaning assigned by subsection 89(1).

Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:

Facts

1. In XXXXXXXXXX ("Parent") had three adult XXXXXXXXXX: XXXXXXXXXX ("C1"), XXXXXXXXXX ("C2") and XXXXXXXXXX ("C3"). Each of C1 and C2 is a resident of Canada for purposes of the Act. C3 passed away in XXXXXXXXXX. Prior to XXXXXXXXXX, Parent acquired a parcel of land on XXXXXXXXXX (the "Subject Land") in the province of XXXXXXXXXX .

2. On XXXXXXXXXX Parent entered into a lease with each of C1, C2 and C3 pursuant to which a portion of the Subject Land was leased to each of them (the portions of the Subject Land leased to C1, C2 and C3 will hereinafter be referred to as the "C1 Land", "C2 Land" and the "C3 Land", respectively).

3. The Subject Land is approximately XXXXXXXXXX acres in size. It is and has always been personal use property. The C1 Land and the C2 Land are approximately XXXXXXXXXX acres in size, respectively.

4. The portion of the Subject Land, which was leased to each of C1, C2 and C3, was set out in a sketch plan attached to each lease. The term of each of the leases was XXXXXXXXXX years at a rent of $XXXXXXXXXX per year. Each lessee had the option of extending the lease for an additional XXXXXXXXXX-year term for similar lease payments of $XXXXXXXXXX per year.

5. Between XXXXXXXXXX, C1, C2 and C3 each built a home, at their own expense, on their respective leased portions of the Subject Land.

6. On XXXXXXXXXX, Parent transferred legal title to the Subject Land to C3. Parent reserved to herself a life lease over the balance of the Subject Land (i.e. the Subject Land not covered by the C1 Land, C2 Land and C3 Land). A court petition filed by C1 and C2 in XXXXXXXXXX alleged that it was Parent's stated intention at the time of the XXXXXXXXXX transfer that C3 would hold legal title only to the C1 Land and C2 Land and that C1 and C2 would become the beneficial owners thereof.

7. On XXXXXXXXXX, C3 died. An undivided one-half interest in C3's interest in the Subject Land was bequeathed to each of her XXXXXXXXXX ("D1") and XXXXXXXXXX ("D2"). Each of D1 and D2 is a resident of Canada.

8. In XXXXXXXXXX, Realco was incorporated under the BCA. Realco is a taxable Canadian corporation and a private corporation. At the time of incorporation, the authorized capital of Realco consisted of XXXXXXXXXX Class A Shares without par value, XXXXXXXXXX Class B Shares without par value and XXXXXXXXXX Class C Shares with a par value of $XXXXXXXXXX each.

9. At the time of incorporation, D1 and D2 were each issued one Class A Share in Realco. These Class A Shares were entitled to vote at all shareholder meetings, were entitled to dividends declared and paid by Realco and were entitled to receive the value of Realco upon winding up or dissolution. The Class A Shares are capital property to D1 and D2.

10. On XXXXXXXXXX, the Subject Land had an appraised value of $XXXXXXXXXX. This valuation excluded the value of the leased parcels of the Subject Land for the remainder of their leases and renewal terms and the value of Parent's life estate in the balance of the Subject Land including her cabin.

11. On XXXXXXXXXX, D1 and D2 each conveyed their interests in the Subject Land to Realco in consideration for an amount owing to them by Realco of $XXXXXXXXXX ($XXXXXXXXXX each). No interest was payable on the amount owing and no promissory note was issued.

12. On XXXXXXXXXX, respectively, C1 and C2 issued a petition and a statement of claim in the Court against Realco, D1 and D2. (hereinafter referred to as the "Lawsuit"). The Lawsuit contended that it was the intention of Parent and her late husband that a subdivision of the Subject Land should occur and that title to the C1 Land and the C2 Land be vested in C1 and C2, respectively, and that the transfer of the Subject Land by Parent to C3 on XXXXXXXXXX was made with the express intention that C3 should hold title to the C1 Land in trust for C1 and the C2 Land in trust for C2.

13. Under the law, the Subject land cannot be severed and the C1 and C2 Lands transferred to C1 and C2 by Realco without providing access to the waterline to the public.

Proposed Transactions

14. D1, D2 and Realco will acknowledge the validity of the claim in the Lawsuit and will acknowledge that C1 and C2 are the beneficial owners of the fee simple interest in the C1 Land and the C2 Land, respectively, such beneficial ownership arising pursuant to a resulting trust (the "Trust") created on XXXXXXXXXX. A Consent Order will be obtained from the Court confirming that C1 and C2 are the beneficial owners of a fee simple interest in the C1 Land and the C2 Land, respectively, and confirming the existence of the Trust.

15. Realco will enter into a Trust Agreement with each of C1 and C2 wherein Realco will acknowledge that it holds legal title to the C1 Land as bare trustee for C1 and that it holds legal title to the C2 Land as bare trustee for C2. Under this agreement, Realco will agree, upon written direction of C1 or C2, as the case may be, to do all acts and things in respect of the C1 and C2 Lands at the expense of, and as directed by, C1 or C2.

16. Realco will file articles of amendment pursuant to the BCA to amend its share structure by:

(a) cancelling the authorized but unissued XXXXXXXXXX Class A Shares without par value, the authorized but unissued XXXXXXXXXX Class B Shares without par value and the authorized but unissued XXXXXXXXXX Class C shares;

(b) increasing the authorized capital by creating one (1) Class A Share without par value, one (1) Class B Share without par value, one (1) Class C Share without par value, one (1) Class D Share without par value, one (1) Class E Share without par value, one (1) Class F Share without par value, one (1) Class G Share without par value, one (1) Class H Share without par value, one (1) Class I Share without par value and one (1) Class J Share without par value;

(c) assigning to the Class A through J Shares an entitlement to a specific portion of the Subject Lands as well as further rights and obligations, and specifically,

(i) the Class A Shares will confirm that the holder has the exclusive use of the C1 Land and will confer on the holder the right to use additional portions of the Subject Land for septic disposal and right of access to the C1 Land and the waterline,

(ii) the Class B Shares will confirm that the holder has the exclusive use of the C2 Land and will confer on the holder the right to use additional portions of the Subject Land for septic disposal and right of access to the C2 Land and the waterline, and

(iii) the Class C through J Shares will confer on the holder the exclusive use of the remaining portions of the Subject Land designated as areas C through J and the right to use Common Property, and

(d) redesignating the issued and outstanding XXXXXXXXXX Class A Shares without par value (of which one each is issued to D1 and D2) to be an undivided one half interest in the Class C through J Shares ("New Shares").

17. C1 will be issued a Class A share and C2 will be issued a Class B share for nominal consideration.

18. Realco will enter into a Personal Use Licence with each of C1 and C2 wherein Realco will acknowledge C1's right to occupy the C1 Land and C2's right to occupy the C2 Land.

19. The amount owing to D1 and D2 by Realco will be reduced to exclude from the purchase price of the Subject Land on XXXXXXXXXX any amount attributed to the C1 Land and the C2 Land and will provide the documentation accompanying the adjustment to the Income Tax Rulings Directorate and to the XXXXXXXXXX Tax Services Office in XXXXXXXXXX. In addition, C1, C2 and C3 will determine the proceeds of disposition to Parent allocable to the C1 Land, the C2 Land and the C3 Land respectively on the transfer of the Subject Land to C3 in XXXXXXXXXX, as described in paragraph 6 above, and will provide such information to the Income Tax Rulings Directorate and to the XXXXXXXXXX Tax Services Office in XXXXXXXXXX.

Additional Information

20. All expenses relating to the Subject Land (other than the cost of acquisition by Realco) have been and will continue to be paid by C1, C2, D1 and D2 personally.

Purpose of the Proposed Transactions

21. The purposes of the proposed transactions are as follows:

(a) to settle the lawsuit initiated by C1 and C2 against D1, D2 and Realco; and

(b) to provide C1 and C2 with some extrinsic evidence of their beneficial ownership of the C1 Land and the C2 Land and to provide a structure whereby C1, C2, D1 and D2 can govern their relationship with respect to the ongoing management of the Subject Land.

Rulings Given

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our rulings are as set forth below.

A. Provided that the Consent Order is issued by the Court confirming the existence of the Trust as described in paragraph 14 above, Realco will not be considered to have disposed of the Subject Land, in whole or in part, as a consequence of the issuance of the Consent Order.

B. Provided that:

(i) D1 and D2 each hold their existing Class A Share of Realco as capital property for purposes of the Act, and

(ii) subsection 85(1) does not apply to the Share Exchange,

subsection 86(1) will apply to the disposition by D1 and D2 of each Class A Share of Realco (each an "Old Share") for an undivided interest in the Class C to J shares ("New Shares") as described in paragraph 16 above, such that:

(a) the cost to D1 and D2 of each class of New Shares receivable as consideration for the Old Share shall be deemed to be that proportion of the adjusted cost base of the Old Share to D1 or D2, as the case may be, immediately before the disposition, that

(i) the fair market value, immediately after the disposition, of the New Share of that class receivable by D1 or D2 (as the case may be),

is of

(ii) the fair market value, immediately after the disposition, of all the New Shares receivable by D1 or D2 (as the case may be) for the Old Share so disposed of; and

(b) D1 and D2 will each be deemed to have disposed of their Old Share for proceeds of disposition equal to the cost of all the New Shares receivable for that Old Share.

C. As a result of the proposed transactions described herein, in and by themselves, subsection 245(2) will not be applied to redetermine the tax consequences confirmed in the rulings given.

The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R4 dated January 29, 2001 and are binding on the Canada Customs and Revenue Agency provided that the proposed transactions, including the reduction of the amount owing and the provision of information described in paragraph 19, are completed or provided by XXXXXXXXXX.

The above rulings are based on the law as it presently reads and do not take into account any proposed amendments to the Act which, if enacted into law, could have an effect on the rulings provided herein.

Caveat

Nothing in this ruling should be construed as implying that the Canada Customs and Revenue Agency has reviewed or is making a determination in respect of:

(a) the fair market value or adjusted cost base of any particular asset or the paid-up capital of any shares referred to herein;

(b) whether C1, C2, D1 or D2 will be required to include a benefit in income pursuant to subsection 15(1) in respect the use of the Subject Land; or

(c) any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above.

Yours truly,

for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch