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.
DATE SEP 14 1987
To A: Current Amendments Division
FROM-DE Corporate Reorganizations II Section
D. Webb
Mike Hiltz 957-2119
ATTENTION Director
RE: Use of Partnerships in Corporation Reorganization
We are receiving numerous telephone inquiries and more frequent requests for advance rulings involving divisive reorganizations in which business or investment assets of a corporation, (OPCO), are "butterflied" to holding companies of OPCO's shareholders, (HOLDCO's), and subsequently rolled from the HOLDCO's into a corporate partnership of which the HOLDCO's are the partners. The partnership carries on the business formerly conducted by OPCO and allocates all the income to the partners. It is anticipated that their will be an acceleration in these requests as more persons recognize the potential or perceived benefits that can be achieved. Part II of the CICA in depth course on corporate reorganizations (a one week course) devoted a day and one-half to the use of corporate partnerships in corporate reorganizations.
Some of the methods used to achieve tax savings or deferrals are:
1. Enabling Canadian shareholders of a Non-Resident Controlled Corporation to have access to the small business deduction.
a) X U.S. b) X US
--|-------------------- --|-------------------
| CANADA | Y CANADA
60% 100%| 100%
| y ------ -----
| / | | | |
| / | XCO | | YCO |
| / ------ -----
| / \ /
| / \ /
-------- 60% \ / 40%
| 0PC0 | \ /
| | V
-------- _______________
/ XY \
( PARTNERSHIP )
\________________/ Under organization 1(a), Y receives no benefit of the small business deduction.
Under organization 1(b), Y Co will qualify for the small business deduction up to its % of ownership x $200,000. In the above example the tax savings available to Y Co would be (40% x $200,000) x 20% (SBD)- $16,000 per annum.
2. Enabling minority shareholder access to the small business deduction where the controlling shareholder has fully utilized the amount in an associated corporation and increasing the aggregate business limit.
a) b) X Y
| ^
X Mr Y 100% | / \ 100%
\ ^ | /100% \
40% \ 60% /| ------- ------ ------
\ / | | | | | | |
\ / | | XCO | | OPCO | | YCO |
\ / | ------- ----- ------
\/ | \ /
| \ /
------ -------- 40% -------------------60%
|OPCO | |YCO | / x OP \
|(CCPC)| |(CCPC)| / Partnership \
______ ______ \___________________/
In example 2(a), Opco and Y Co share the business limit for a taxation year, maximum $200,000.
In 2(b), X Co and Opco are not associated. X obtains access to the small business limit up to its percentage ownership. (In this example $80,000.) Total income eligible for the small business deduction is $280,000.
3. Deferring of tax through the use of staggered year ends.
X Y
| |
| |
----------- ----------
| X LTD | | Y LTD |
| | Y/E 11/30/87 | | Y/E 11/30/87
----------- ------------
\ /
\50% /50%
\ /
\ /
\ /
\ /
---------------------------
/ XY \
\ PARTNERSHIP /
---------------------------
Y/E 12/31/87
X Ltd and Y Ltd do not report the 1988 income of XY partnership until fiscal year 11/30/89.
This gives them an 11 month deferral on taxes and installments. Greater deferrals are possible through the use of multiple partnerships.
4. Use of the provisions of subsection 129(6) of the Act and Norco v. The Queen.
Several variations of this are possible but the essential element is the use of subsection 129(6) to convert what would otherwise be income from property to active business income and circumvent the specified partnership income rules, increasing the aggregate annual business limit.
X Y
| |
| |
100% | | 100%
| 100% |
------------- ----------- -------------
| X LTD | | REAL CO | | Y LTD |
| |-------| | | |
------------- ----------- -------------
\ | /
\ Loan | Funds / 40%
60% \ Lease | Property /
\ | /
\ | /
\ | /
--------------------------------
/ XY \
\ PARTNERSHIP /
--------------------------------
Real Co loans funds or leases property to XY. The income Real Co receives would normally be income from property but pursuant to 129(6) and Norco property income paid by the partnership is considered to be paid by the partners.
The amount paid by XY to Real Co that represents X Ltd's portion would be active business income to Real Co. Real Co's income would not be subject to the specified partnership income rules.
5. Depending upon the choice of year ends and timing of the transfer of property, (and using the exemptions contained in subsection 1100(2.2) of the Income Tax Regulations it is possible to double and perhaps triple the capital cost allowance claim in the year of the transfer.
The preceding summarizes some of the benefits that may be achieved through a divisive reorganization followed by the setting up of a corporate partnership. In addition, since it is now taxable income that flows to the corporate partner rather than non-taxable dividends the shareholder of the corporate partner has greater access to income splitting techniques and loss sheltering.
ORIGINAL SIGNED BY ORIGINAL SIGNÉ PAR
R J L READ
Director General Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch
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© Her Majesty the Queen in Right of Canada, 1987
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© Sa Majesté la Reine du Chef du Canada, 1987
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