7 November 1990 Income Tax Severed Letter 92A

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.

Dear Sirs:

Re: Paragraph 55(3)(b) of the Income Tax Act (the "Act")

This letter is in response to your letter of September 14, 1990 in which you requested a technical interpretation of paragraph 55(3)(b) of the Act in the following hypothetical situation:

• 1. The assets of a particular corporation (the "Particular Corporation") consist a rental property and the shares of a wholly-owned subsidiary corporation (the "Subsidiary Corporation").
• 2. The only significant asset of the Subsidiary Corporation is a second rental property approximately equal in value to the rental property owned directly by the Particular Corporation.
• 3. The rental properties owned by the Particular Corporation and the Subsidiary Corporation are capital property of each corporation.
• 4. The shares of the Subsidiary Corporation will be transferred to a transferee shareholder in the course of a transaction taking the form of a "single-wing butterfly" reorganization.

Questions

You have requested our comments concerning the following questions:

• 1. Whether the shares of the Subsidiary Corporation held by the Particular Corporation may be considered to be the same "type of property" as the rental property held by the Particular Corporation.
• 2. Whether, in determining the value of each "type of property" to be transferred to the transferee shareholder, the appropriate value is the value of the Particular Corporation's shares in the Subsidiary Corporation or the value of the value of the rental property and other assets owned by the Subsidiary Corporation.

Comments

With respect to your first question, for the purposes of paragraph 55(3)(b) a corporation usually will be considered to hold any or all of three different types of property. These types are referred to as cash or near-cash property, investment property and business property.

Where a property considered is a rental property held by a particular corporation, the property generally will be considered to be a business property where the income from the property can be considered active business income. On the other hand, where the income from the rental property can be considered to be income from property or income from a specified investment business, the rental property generally will be considered to be an investment property.

Where the property considered is a share of a corporation held by a particular corporation, the share may be considered to represent any or all of the three different types of property depending upon the circumstances. Where a particular corporation controls or has the ability to exercise significant influence (within the meaning of paragraph 3050.21 of the CICA Handbook) over a corporation in which it owns shares (the "subject corporation") a "look-through" approach will be used in classifying such shares. This involves a determination of the nature and value of each type of property held by the subject corporation for the purpose of determining the type or types of property of the subject corporation to which the value of the shares of the subject corporation is attributable. Accordingly, in your hypothetical situation, the Particular Corporation's investment in the Subsidiary Corporation would be "looked through" to examine the nature of the assets held by the Subsidiary Corporation. As a result, a transferee shareholder who receives a share of the Subsidiary Corporation in the course of a transaction taking the form of a butterfly reorganization would be considered to have received a portion of each type of property owned by the Subsidiary Corporation. Where the assets of the Subsidiary Corporation include a rental property, this rental property must be examined in the same manner as the rental property owned directly by the Particular Corporation in order to determine the type of property of the portion of the Subsidiary Corporation shares which can be considered to represent the Subsidiary Corporation's investment in the rental property. As a result, the rental property held by the Particular Corporation may or may not be considered to be the same type of property as the portion of the Subsidiary Corporation shares which can be considered to represent the Subsidiary Corporation's investment in the rental property.

With respect to your second question, where the assets of the Particular Corporation that are being transferred to the transferee shareholder in the course of a transaction taking the form of a butterfly reorganization are shares of the Subsidiary Corporation, the fair market value of the shares of the Subsidiary Corporation (and not the fair market value of the assets of the Subsidiary Corporation) must be ascertained and allocated to the appropriate type of property for the purposes of determining whether the pro-rate requirement of paragraph 55(3)(b) has been satisfied.

The comments contained herein are only expressions of opinion and are not binding on Revenue Canada, Taxation, in accordance with the procedures set out in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990.