Disposition

A Canadian-resident taxpayer deposits crypto-assets held on capital account with a custodial centralized crypto-asset trading platform (the “Platform”) that is compliant with the requirements of the Canadian Securities Administrators (CSA) including that crypto-assets deposited with a Platform are held separately from the Platform’s own assets and in trust for each respective investor. The taxpayer may also “stake” crypto-assets through the platform, i.e., validating transactions in respect of a crypto-asset and adding them to a publicly distributed ledger through proof-of-stake blockchain protocols.

In finding that neither such deposits nor staking entailed a disposition, the Directorate stated:

[I]t is our understanding that, as a crypto-asset trading platform that is compliant with the CSA’s requirements, the Platform does not acquire beneficial ownership of any of the Deposited Crypto or Staked Crypto. Instead, users retain beneficial ownership of the Deposited Crypto and Staked Crypto at all relevant times. Further, it is our view that, based on the facts submitted, none of the specific inclusions in the definition of “disposition” in subsection 248(1) would apply to trigger a disposition.

Daughter1 and Daughter2 (sisters) had been the equal income beneficiaries of a testamentary trust (the Fund). However, on the death of Daughter2, ½ of the Fund property had been distributed in accordance with the Fund terms to her issue.

Daughter1, who has no children, will now execute a written renunciation of her income interest in the Fund. However, Daughter1 will also approve a scheme of distribution (prepared by a trust company serving as trustee) for the distribution of the Fund property (mostly, marketable securities and MFT units, to be distributed in specie), to the three children of Daughter2 in equal shares.

This will occur as an interim distribution, and then a final distribution after a clearance certificate is received.

Rulings included that the renunciation by Daughter1 of her income interest in the Fund will not result in her being considered to have received any proceeds of disposition for purposes of ss. 40(1), 106(2) and 107(1), and that the transactions (other than the property distributions by the Fund, governed by s. 107(2)) will not result in a disposition of any property of the Fund.

A Delaware corporation was converted into an Iowa limited liability company (the “Conversion”) pursuant to provisions in the applicable statutes that contemplated that the converted entity was the same entity as the converted corporation. The Directorate stated:

[B]oth are considered corporations for the purpose of the Act. … In such case, the CRA would generally rely on the relevant foreign corporate or company law and the details of the plan of conversion to determine whether there is a continuity of existence on the Conversion.

Under the relevant provisions of [the two statutes] the Conversion is not deemed to constitute a wind-up or dissolution of [the company, and it] is considered to be the same entity as and a continuation of [the other].

Provided that the plan of conversion does not provide for [it] to cease to exist, it is our view that, for the purposes of the Act, [it] is considered to be the same entity that it was prior to the Conversion. Consequently, in this case, [it] can retain the same business number and tax accounts after the Conversion for Canadian tax purposes.

The taxpayer, a resident individual, deposited two types of crypto-assets (the “Deposited Tokens”) into liquidity pools in a crypto pooling vehicle (the “Platform”), in exchange for two classes of “Receipt Tokens” (aka “RTokens”), which evidenced such deposits and could themselves be transferred, or used to claim corresponding underlying deposited assets.

The taxpayer subsequently redeemed the Receipt Tokens for crypto-assets of the same type as the Deposited Tokens, at a time that they had appreciated in value. In the meantime, the taxpayer received a return from the Platform (the “Rewards”) in the form of “Nativetoken,” which also could be realized upon by exchanging them through decentralized exchanges for other crypto assets.

The Directorate found that the taxpayer’s deposit of the Deposited Tokens into a liquidity pool on the Platform and the redemption of Receipt Tokens for crypto-assets of the same type as the Deposited Tokens (or sale of Receipt Tokens) constituted dispositions if those tokens had been held on capital account (noting in this regard that 2014-0525191E5 had indicated “that an exchange of one type of virtual currency for another would trigger a disposition for income tax purposes”).

CRA ruled that the conversion of a listed REIT from a a closed-end unit trust under s. 108(2)(b) to an open-end unit trust under s. 108(2)(a) through the addition of a retraction right to the unit terms would accomplish that objective and would not result in a dispostion of trust property or of units. The ruling letter specified a requirement that the term of any notes issued and transferred to a retracted unitholder would not have a term of greater than X years from the date of issue.

Even before taking into account the introduction of s. 150(1.2), s. 150(1.1)(b)(ii) required a trust which disposed of capital property in a year to file a T3 return for that year. Would a bare trust, that complied with the low-asset test in s. 150(1.2)(b), be required by s. 150(1.1)(b)(ii) to file a T3 return by virtue of a Canadian-dollar bond held by it maturing in the year?

CRA noted that under s. 104(1), the bare trust was not a trust for purposes of the definition in s. 248(1) of “disposition,” other than ss. (b)(v) and (k) of that definition, which were not relevant in this context, so that there would be no disposition by the bare trust of the bond.

Background

The Partnership is an exempted limited partnership under the Exempted Partnership Act 1992 (Bermuda) (the “EPA”), the Limited Partnership Act 1883 (Bermuda) (the “LPA”) and the Partnership Act 1902 (Bermuda) which has not elected pursuant to those statutes to have legal personality and whose only assets are shares of subsidiaries. A non-resident corporation holds the only general partner unit, Canco holds three series of Class A limited partnership units and the other limited partnership units are held by non-residents and by partnerships which are not Canadian partnerships. The Partnership activity was carried on in common with a view to a profit and the Partnership was considered a partnership for purposes of the Act prior to the Proposed Transaction.

Proposed Transaction

In order to be “domesticated” as a limited partnership under the Delaware Revised Uniform Limited Partnership Act (the “DRULPA”), the Partnership will deregister under the LPA and EPA by obtaining certificates of de-registration under those statutes, and will file in accordance with §17-215(b) of the DRULPA (i) a certificate of limited partnership domestication that is executed in accordance with §17-204 of that statute; and (ii) a certificate of limited partnership that complies with §17-201 and has been executed in accordance with §17-204 of that statute. All other terms and conditions under the Partnership Agreement will remain unamended.

Additional Information

S. 13(B) of the EPA and s. 26 of the Bermuda LPA provides that the de-registration shall not create a new legal entity, prejudice or affect the continuity of the partnership, or affect the property previously acquired by or on behalf of the partnership.

§17-215 of the DRULPA provides that the limited partnership shall be deemed to be the same “entity” as the domesticating non-United States “entity” and the domestication shall constitute a continuation of the existence of the domesticating non-United States “entity” in the form of a domestic limited partnership.

Following the Proposed Transaction, the Partnership will be a separate legal entity pursuant to §17-201(b) of the DRULPA.

Rulings

Following the Proposed Transaction, the Partnership will be treated as a partnership for purposes of the Act and the Proposed Transaction will not, in and of itself, cause the Partners to have a “disposition” of their Units or the Partnership to dispose of its property.

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In return for depositing the taxpayer’s bitcoins with a centralized cryptoasset exchange and lending platform, the latter offers the taxpayer a variable return of approximately 4% per annum, payable in bitcoin. The platform holds the bitcoins in its own name and may pledge, sell or lend the bitcoins deposited in the account in its discretion without informing the taxpayer. The profit derived from the use of the bitcoins by the platform is its property and not the taxpayer’s. The taxpayer is entitled to withdraw up to an equivalent of the taxpayer’s bitcoin account balance at any time, with withdrawal being paid from a cryptocurrency wallet in which the bitcoins received from the platform's various customers are collectively deposited.

In finding that there likely was a disposition on the bitcoin transfer to the platform, CRA indicated that it was “likely that ownership of the bitcoins initially belonging to the taxpayer was transferred to the platform” and, in particular, that “the platform acquired the right to use the assets, to make profits from them and to dispose of them at its discretion.”

Background

Ms. X was the “first trustee” (with special rights regarding the appointment or replacement, but not removal, of trustees) of a discretionary trust of which her spouse (Ms. Y), two brothers (Brother C and Brother D) and children of the brothers were beneficiaries. The trustees (Ms. X and Mr. A, who had to act unanimously re beneficiary designations) had the power to add additional beneficiaries, including corporations whose only shareholders, or trusts whose only beneficiaries, were certain of the persons referred to in the trust deed. The trust deed could be amended pursuant to a court order.

Proposed transactions

1. Pursuant to a court order, the list of beneficiaries which can be designated will be expanded to include inter alia corporations whose shareholders also include corporations or trusts which had previously been added as beneficiaries.
2. Following this amendment, Brother C and his two children will incorporate Cco and subscribe for shares of Cco, Brother D and his two children will incorporate Dco and subscribe for shares of Dco, Cco and Dco will subscribe for shares of newly incorporated Eco, and Ms. Y will subscribe for shares of newly incorporated Fco.
3. Cco, Dco, Eco and Fco will be added by written designation of the trustees as beneficiaries.

Rulings

The obtaining of the Court judgment amending the Trust Deed and the addition of Cco, Dco, Eco and Fco as beneficiaries will not, in and of itself, result in a disposition of all the property of the Trust.

Such obtaining of the Court judgment will not, in and of itself, result in a disposition by the existing beneficiaries, of any part of their respective interests in Trust (including for the purposes of ss. 106(2) and 107(1)) nor will they be considered to have received proceeds of disposition as a result of the addition of the beneficiaries and, for greater certainty, s. 69(1)(b) will not apply as a result of this addition..

The CRA summary states:

The addition of a new beneficiary to a discretionary trust by the exercise of a power to add such beneficiary in the trust deed results in a disposition, by the existing beneficiaries, of a portion of their interest in the trust. However, provided the existing beneficiaries do not direct to whom the interest is transferred, they would not be deemed to have received proceeds of disposition under paragraph 69(1)(b). This is also true for the trustee/beneficiary who, in this particular situation, is not considered to have control over the decision to add a new beneficiary.

A corporation incorporated under the CBCA (Opco) was continued as a co-operative under the Co-operative Corporations Act (Ontario), so that certificates of discontinuance and continuance were issued under each statute. On the continuance, each common share of Opco was “converted” pursuant to the articles of continuance into a share of the share capital of the co-operative, having the same paid-up capital.

CRA ruled that the continuance did not result in a disposition by Opco of its assets, that there was no deemed dividend under s. 84(1) having regard to the safe harbor in s. 84(1)(c) (i.e., there was no overall increase in PUC), that the s. 86(1) rollover applied to the conversion of the shares on the continuance and that no deemed dividend arose under s. 84(3) having regard to the rule in s. 84(5) (deeming the amount paid for the Opco common shares to be the PUC of the co-operative shares).

Pursuant to s. 54 of a Business Corporations Act [see s. 54 of the OBCA] certificated securities (represented by share certificates) of a corporation are replaced with uncertificated securities (represented by electronic records), by way of a notice (a notice of shareholder interest) to each shareholder with the information required to be stated on a share certificate (a process known as dematerialization), or the corporation’s uncertificated securities or notices of shareholder interest, are replaced with share certificates. Furthermore, a shareholder, who has lost its share certificate and has signed a declaration of loss and indemnity, may receive a replacement share certificate or a notice of shareholder interest from the corporation.

CRA indicated that these processes would not in themselves trigger a disposition, stating:

It is our understanding that a share certificate or notice of shareholder interest is simply evidence of the ownership of a share (or shares). In addition, you have advised … that … there is no change in the capital structure of the Corporation, the number of outstanding shares, the number of shares held by any shareholder, or the interest, rights, or privileges attached to any share.

[Accordingly] …. the actions undertaken would not, in and of themselves, constitute a redemption, acquisition, or cancellation of any share of the Corporation, or otherwise result in a disposition of a share of the Corporation.

In 2013-0487791E5 F, CRA reversed its position in 2012-0472101E5 F and indicated that it now considered that the entering into of an emphyteutic lease represents a part disposition of property rather than something analogous to the entering into of a common law lease. Therefore, any "rents" receivable must be recognized as proceeds of disposition at the time of grant rather than as amounts which can be recognized over time as they become receivable (although a s. 40(1) reserve may be available).

CRA here stated that 2013-0487791E5 F continues to represent its position.

A US parent indirectly holds a profitable Canadian corporation (Canco1), and a US subsidiary (USco1) that has been carrying on a branch business in Canada at a loss. In order that Canco1 can access the non-capital losses of USco1, USco1 will be continued twice: the first time, perhaps into another US jurisdiction that has better continuance provisions; and the second time, into a provincial jurisdiction, where it (for US tax reasons) will initially be a ULC, but then will convert to a regular business corporation. USco1 will then be continued under the CBCA, in order that it can amalgamate with Canco1, which is a CBCA corporation.

Rulings included that USco1 will continue to be the same corporation following the continuances and that, in light inter alia of s. 87(2.1), the non-capital losses of USco1 will be available to be utilized by Amalco (which will continue to carry on the USco1 business).

A number of jurisdictions have been working on developing risk-free-rates (RFRs) to replace the existing interbank offering rates (IBORs) used as benchmarks, for example, for Canada, replacing CDOR by the Enhanced Canadian Overnight Repo Rate Average (CORRA) and, for the U.S., replacing USD LIBOR by the Secured Overnight Funding Rate (SOFR). Will any tax consequences be triggered by such IBOR-to-RFR transition? CRA responded:

In general terms, the determination of whether an obligation has been disposed of for Canadian income tax purposes depends on whether these events are considered to result in the discharge of the obligation and the substitution of a new obligation under the law governing the former obligation … .

Where the governing law is Canadian … making a RFR Amendment to an IBOR Instrument to accommodate the transition from IBOR to RFRs, in and of itself, would generally not constitute a disposition of the IBOR Instrument … .

Where foreign law governs an obligation … the legal effect of these events on such an obligation under the relevant foreign law must be considered in order to determine if the obligation has been disposed of … .

Current structure

USco is a US-resident corporation that is subject to tax in Canada and the US (in each case, as a regarded corporation). USco has only one class of shares issued and outstanding, being common shares divided into seven series with identical rights (the “Existing Common Shares”). The Existing Common Shares are owned by Foreign Sub (a holding company for two foreign “Pubcos”), Foreign Co, Canco1 (a Canadian public company entitled to royalties on the sales of USco) and Canco2 (also entitled to a percentage of such sales). Foreign Sub and its two shareholders deal at arm’s length with Canco1, Canco2 and Foreign Co. The shares of USco are taxable Canadian property.

Purpose of reorganization

With a view to becoming a publicly listed corporation, USco wishes to (i) reclassify all the Existing Common Shares as a number of shares of a single series of the “Reclassified Common Shares” (which will have the same terms, rights and preferences as the Existing Common Shares) in order to create a per share value for the Existing Common Shares that will be consistent with the preferred trading value of the Reclassified Common Shares and (ii) implement a stock split.

Proposed transactions

USco will reorganize its capital by amending its articles of incorporation to reclassify and split all the Existing Common Shares as a class with a single series (the “Reclassified Common Shares”) with the same terms, rights and preferences as the Existing Common Shares.

Rulings

The proposed transaction will not result in a disposition of the Existing Common Shares, or their acquisition by USco, and no s. 116 certificate will be required.

A union that was eligible for the s. 149(1)(k) exemption and that had been collecting union, ceased to be the accredited bargaining agent for the employer, as a result of which it is being wound-up and will be distributing its remaining assets to its members as required under its articles. CRA ruled that the amount so paid to the members will constitute proceeds of disposition of their rights as members in the union, thereby resulting in a capital gain.

A Canadian public corporation (Parent”) wished to spin off, to its shareholders, the shares of a Canadian Newco indirectly holding a U.S. business. Pursuant to a Plan of Arrangement, the notice of articles and articles of Parent will be amended:

(i) To change the Common Shares into Class A Common which, in contrast to the Common Shares, will have more than one vote per share;

(ii) To create a new class of common shares of Parent (the “New Common Shares”), which will have the same terms and attributes as the Common Shares immediately prior to the above change.

Each issued and outstanding Class A Common Share then will be exchanged for one New Common Share and a specified fraction of a Newco Share (the “Exchange”), with no s. 85 election being made.

Before ruling that s. 86 applied to the Exchange, CRA rules that the change of the common shares into Class A Common Shares is not a disposition.

Where a US LLC makes an election to be treated as a corporation for US tax purposes, will the making of the election have Canadian tax implications?

CRA indicated its understanding that this would not impact the US legal attributes or the laws regarding the governance or operation of the LLC. As from a US legal perspective, the LLC remains the same legal entity after checking the box as it was before it made the election, the election would not result in a disposition of either the units held in the LLC by its members or of the LLC’s assets for Canadian purposes.

The Declaration of Trust of a Canadian REIT (the “Fund”) will be amended to provide for the consolidations of its units following s. 132.2 merger transactions, for the in specie redemption of Fund units through distribution of securities of a Fund subsidiary including units of a mutual fund trust received in connection with one of such s. 132.2 merger transactions and adding the right of a subsidiary to renounce its right for most of the Fund Units otherwise issuable on one of the s. 132.2 merger transactions.

An indirect subsidiary of the Fund (Opco) and a newly-incorporated subsidiary of Opco (GP II) will form Opco Partnership as a general partnership, with Opco transferring real estate to Opco Partnership on a s. 97(2) rollover basis. Opco Partnership will then be converted to a limited partnership, with no significant changes to the rights and obligations of the partners other than Opco becoming a limited partner.

Rulings that neither transactions result in a disposition.

The loan owing by a foreign affiliate to a non-resdient sister had had a maturity date that was automatically extended for consecutive one-year terms unless terminated by either party. The “Additional Information section of this ruling letter stated that these automatic extensions did not result in a new loan being made for the purposes of s. 90(6).

Proposed creation of new class of units to fund trailer fees

The Declaration of Trust of an open-ended non-SIFT mutual fund trust (the “Trust”) with a corporate trustee (the “Trustee”) and with only one class of units will be amended to create two classes of units, so that the existing units will be re-designated as Class F units and a new class of units (Class A units) will be created which will have the same attributes as the Class F units except that they will bear exclusively an additional management fee, payable by an indirect subsidiary real estate operating LP to its GP (“Operating GP” – controlled by Trustee), which will fund the cost of trailer fees payable to investment dealers who have sold Class A units, with this resulting in a reduction of the distributions paid on the Class A, but not on the Class F, units. The amendments will also grant the Trustee the power and authority, from time to time, to create one or more classes of units on such terms and conditions as the Trustee may determine, provided that such creation does not adversely affect the pecuniary value of the interest of any unitholders in the Trust.

Amendment without Unitholder approval

These amendments will occur pursuant to a provision of the Declaration of Trust permitting an amendment by the Trustee without Special Resolution if, in the opinion of the Trust’s lawyers, it is not a material change which adversely affects the pecuniary value of the interest of any Unitholders and does not relate to:(i) any material change in the position, authority or responsibility of the Trustee; or (ii) any change in the investment policy of the Trust or to the Declaration of Trust, if such change is material or is otherwise required by the Declaration of Trust.

Purpose of amendment

The Trustee and Operating GP wish to increase the engagement with securities dealers who charge trailer fees in order to grow the overall investor and asset base of the Trust. The amendments are contemplated to better target trailer fees to those who purchase their units through securities dealers.

Rulings

The Amendments will not, by themselves, result in a disposition by the Trust of its property or the creation of a new trust. The re-designation of the existing units into Class F units will not, by itself, result in their disposition. The creation of the Class A units will not cause s. 104(7.1) to apply.

A non-resident commercial trust (the “Trust”) governed by the laws of a non-resident common law jurisdiction was settled with cash and real estate by “Corp.” and “Ltd.” Each was a capital and income beneficiary. Corp. directly or indirectly held a majority of the ordinary shares of the trustee. Corp. funded the cash portion of the Ltd. contribution with a loan secured on the Ltd. shares and Ltd.’s beneficial interest in the Trust. Ltd. defaulted under the loan.

Pursuant to a Rights Agreement, Corp. sold to an unrelated Canadian-resident third-party purchaser (“Inc.”) its interest as beneficiary in the Trust and (subject to judgment being issued in Corp.’s favour in an action against Ltd., which in fact occurred) the minority beneficiary interest of Ltd in the Trust – as well as the shares of the trustee. Immediately thereafter, the real estate was sold out of the Trust. A short taxation year for the Trust occurred as a result of the Trust becoming resident in Canada on the transfer of the shares of the trustee, so that the sale occurred in the subsequent taxation year of the Trust. The gain on sale was reduced by non-capital and net capital losses of the Trust.

The Directorate found that at common law there was a resettlement of the Trust when the above sale occurred, so that the losses could not be carried forward. It stated:

[T]he two original beneficiaries were not specifically prohibited from disposing of their capital and income interests in the Trust by selling it to someone else. However, in doing so the intention of the two original settlors is completely set aside. The intention of the settlors, as clearly spelled out in the Trust Deed, was to have the trustee hold and invest the capital of the trust for the benefit of two specific beneficiaries, the two original settlors themselves, and this is no longer the case.

Additionally, only Corp sold its capital and income interests through the Rights Agreement. Ltd was not a party to the Rights Agreement. The disposition by Corp of its capital and income interests was not authorized by the Trust Deed. …

[T]he transaction changed the whole substratum or “raison d’etre” of the Trust.

An estate (that was a testamentary trust) holding appreciated assets has five grandchildren who would receive as residuary beneficiaries under the estate following the death of “Ms. A and Mr. B” (presumably siblings or siblings in law, and parents of the grandchildren). CRA ruled that a disclaimer by the grandchildren - resulting in a distribution of the residue of the trust assets to Ms. A and Mr. B on an intestacy – would not result in any of the grandchildren receiving proceeds of disposition.

Structure

C Co is a corporation incorporated under the Delaware General Corporation Law (“DGCL”) which is wholly-owned (through the ownership of all its par value common shares) by B Co, which is a Canadian-resident unlimited liability corporation.

Continuation under Delaware law

Ss. 266(f) of the DGCL provide that the conversion of a domestic corporation, such as C Co, to an LLC shall not constitute a dissolution of the corporation, and that upon conversion, the other business form shall, for all purposes of the laws of Delaware, be deemed to be the same entity as the corporation. Ss. 8-214(d) and (g) of the Delaware Limited Liability Company Act (“DLLCA”) provide that the existence of the LLC shall be deemed to have commenced on the date the other entity was first incorporated and that the LLC shall, for all purposes of the laws of the State of Delaware, be deemed to be the same entity as the converting entity.

Proposed transactions

With the approval of its shareholder (B Co), C Co will file a certificate of formation under the DLLCA, and a certificate of conversion under the DGCL and DLLCA, so that all property and debts of C Co become vested in the LLC. As a consequence of the conversion, all the C Co common shares become LLC common shares. The LLC makes a check the box election to be treated as a corporation for Code purposes effective on its date of formation.

Rulings

Following the conversion, C Co will be considered to be the same corporation as before the conversion, it will not be considered to have thereby disposed of its assets, and B Co will not be considered to have disposed of its C Co shares, which will have the same ACB.

CRA reasons (in summary)

The Delaware legislation treats the LLC as a continuation of the converting corporation and the LLC is a corporation for purposes of the Act.

CRA ruled that the amendment of the trust deed for a listed mutual fund trust to add preferred units (also to be listed) would not result in the application of s. 104(7.1) or any disposition of trust property or existing units.

A butterfly spin-off by a public corporation (DC) of two business divisions (which it prepackaged in a Newco subsidiary) is preceded by a drop-down of the assets (some held directly) of those two divisions by DC into Newco. This drop-down, in turn, is preceded by an amendment of the long-term contract for DC’s management by Manageco. This amendment accommodates the split-up, e.g., splitting the compensation between management of the retained Division 1, and of the Divisions 2 and 3 to be spun-off, with this division to be effected based on the relative (post-drop-down) fair market value of the Newco shares.

CRA ruled that these amendments would not cause a disposition of the contract.

At the same time as the drop-down of Divisions 2 and 3 to Newco, Manageco will then effect a s. 85(1) dropdown of its management business to two new subsidiaries.

A corporation rents a property under an emphyteutic lease for a lump sum. Is it able to amortize that amount over the period stipulated in the deed constituting the emphyteusis? CRA responded (TaxInterpretations translation):

[A]t civil law, an emphyteusis is not a lease, but instead a division of the property rights [citing Gatineau v. Canada, 2013 FC 439]. Consequently, the taxation rules applicable to a lease do not apply… .

If the emphyteusis is made for consideration, the sum so provided, whether payable in a lump sum or by instalments, is considered as proceeds of disposition of a right of emphyteusis or of part or all of the property subject to the emphyteusis. In other words, the grant of an emphyteusis constitutes the disposition of property for income tax purposes. … [Accordingly] the sum received on the grant of an emphyteusis cannot be amortized over the term because the emphyteusis is not considered as a lease and the sum received is proceeds of disposition. However, by virtue of subsection 40(1) … a taxpayer can claim a reserve…

2012-047210 no longer reflects the CRA position… .

On a date prior to 1988, the Trust was created and Mother (a U.S. resident) and each of her children (also U.S. residents) transferred their interests in the Property to the Trust. The Trust Deed provided that during the duration of the Trust, and provided that each of the Children was then living, Mother and the Children had the right to revoke the Trust , in which event the trust estate was to be distributed in specified shares to Mother and each of the Children. Upon the death of the last of the surviving Grantors of the Trust or upon the sale of its property, the trust estate was to be distributed to the then living descendants of Mother, per stirpes.

CRA concluded:

As stated in our presentation at the 1995 CTF conference…a revocable living trust should be recognized for income tax purposes at the time that legal title to property is transferred to it and that the transfer of the property is at its full fair market value… . Therefore… the Trust would be subject to the 21-year deemed disposition provisions of subsection 104(4)… .

An open-end mutual fund trust ("Fund 1") investing in senior floating rate loans around the world will add a class of units (the "Hedged Class") intended for investors who wish to invest on a currency neutral basis. Accordingly, Fund 1 will purchase currency forward contracts (the "Canadian Hedging Contracts") solely in respect of the Hedged Class, and:

The Hedged Class…will have a return that is based on the performance of Fund 1's portfolio of investments without regard for the performance, either positive or negative, attributable to changes in value of the relevant foreign currency relative to the Canadian dollar because the foreign currency exposure of the portion of Fund 1 that is attributable to the Hedged Class will be substantially hedged using the Canadian Hedging Contracts.

Rulings re no disposition of the existing units on such amendment, no resettlement of Fund 1 and no application of s. 104(7.1).

"Preliminary view" expressed that a reclassification or exchange of a Unit for a Hedged Unit, or vice versa, "would likely result in a taxable disposition." [2010-0389921R3 is similar, except that it expressly states that under the terms of the trust deed, non-hedged unitholders will not be able to convert their units for hedged units, and vice versa.]

A limited partnership "has ceased all activity but has not legally ceased to exist;" and "all partnership funds have been lost in a failed investment." After finding that s. 50(1) did not deem there to be a disposition of the LP units, CRA stated:

[W]here a partnership is dissolved and the taxpayer is not entitled to and does not receive any share of the partnership's net assets (if any), the dissolution would generally result in a disposition of the partnership interest and an amount of zero may be used as proceeds of disposition… .

An inter vivos trust (Trust), with three individual trustees holds Class A non-voting common shares and C special voting shares of Corporation. An estate, whose three executors are the same individuals, holds non-voting Class B preferred shares. In order to convert the estate's interest into a substantial interest for Part VI.1 purposes, they cause Corporation to redeem the Class C voting shares which, in turn, causes the Class B preferred shares to become voting pursuant to s. 48(2) of the Quebec Business Corporations Act (a provision which effectively deems all shares to become voting whenever none is voting).

Respecting a mooted disposition of the Class A and B shares on their becoming voting, their voting rights arose by operation of the corporate law rather than from a modification of the rights of the shares as described in the articles. Furthermore, there was no cancellation and replacement of shares, and no change of control occurred. Accordingly, there was no disposition of the Class A or B shares.

In order to isolate cost base in preferred shares, a taxpayer transfers his common shares of a corporation to the corporation in exchange for preferred shares and common shares. In 2004-0092561E5, CRA indicated that there will not be a disposition of the "transferred" common shares to the extent that, following this transfer, the taxpayer holds shares with the same rights and restrictions as the transferred common shares. Is this position changed as a result of the enactment of s. 49, para. 3 of the Quebec Business Corporations Act, which provides that "the articles may provide that the shares of two or more classes or two or more series of the same class carry the same rights and restrictions"? CRA stated (TaxInterpretations translation):

[W]e consider the participation of a shareholder in the share capital of a corporation as being intangible property constituting the collection of the rights and conditions ("bundle of rights") respecting the shares, in accordance with the articles and relevant corporate law.

The CRA applies the same position as stated in the above-noted Technical Interpretation if, by virtue of the BCA, a share of a given class issued in exchange for a share of a different class of shares has the same rights, privileges, conditions and restrictions as the share of the other class.

CRA declined to respond in the absence of more particulars as to the date of disposition of land where a promise to purchase is signed in Year 1 with the acquisition subject to the satisfaction of conditions, and with the agreement to close extended by a further two years at the expiration of the three year term of the initial promise to purchase. CRA referred to IT- 170R as being of assistance in the determination.

Mr. A, who is resident in Canada, settles a discretionary family trust whose beneficiaries are Mr. B and Mrs. B and their children, but only if they are resident in Canada. A daughter (Mrs. X) of Mr. and Mrs. B then leaves the U.S. and becomes a resident of Canada. CRA stated that

it would appear that Mrs. X may be a beneficiary of the trust from its creation, but that she would be entitled to receive a distribution from the trust only when she becomes a resident of Canada....[I]f it can be established that there was no addition of a beneficiary when Mrs. X became a resident of Canada, then in our view, there would be no disposition of income or capital by the other beneficiaries.

Respecting the alternate interpretation that Mrs. X had become a beneficiary when she became a resident of Canada, CRA indicated that this would result in a disposition of the interests of the other beneficiaries - after earlier having stated that:

where the terms of the trust agreement of a discretionary trust provide for an addition of a beneficiary and the trustees' exercise their right to add such a beneficiary, it would not result in the creation of a new trust, nor in the resettlement of the trust.

A REIT formed a unit trust (“MFT”) by causing its subtrust to transfer its assets to MFT pursuant to s. 107.4, distributed a small number of units of MFT to its unitholders, issued REIT units to MFT under a s. 132.2 merger, which also was followed by a redemption in its hands and those of the REIT unitholders of the MFT units for REIT units. The number of outstanding REIT units was then consolidated back to the previous number (pursuant to a clause previously added to the Declaration of Trust providing for this to occur automatically).

Ruling that such consolidation did not trigger a disposition.

A variation of a trust made pursuant to an application to a Superior Court in order to authorize the capital encroachment that would be entailed in the trust distributing its Class A and B common shares of Opco to the offspring of two families would not result in a disposition of property held by the Trust or a disposition of income or capital interests in the Trust.

In order that the Corporation's liabilities will not fluctuate with the value of the "Deferred Payment Units" ("DPUs") held by participants, the Plan will be amended to provide that a DPU payment may be made to a participant by the issuance of one common share of the corporation for each whole DPU in the alternative to cash settlement, in the discretion of the Board.

Ruling that such amendment will not result in a disposition by participants or income inclusions under s. 5 or 6.

As part of a larger reorganization, a Canadian partnership held by four Canadian corporations in the group (Sellptp) distributes shares of a corporate subsidiary (Keepco5) as a return of partnership capital to one of its four partners (Sellco1), thereby realized a taxable capital gain. Ruling that the partners will not be considered to have disposed of all or part of their partnership interests in that partnership as a result of the distribution.

LossCo and ProfitCo, both are indirect subsidiaries of a foreign parent. LossCo is indebted to ProfitCo under the LossCo Indebtedness. Proposed transactions include:

• the terms of the LossCo Indebtedness will be amended to make them convertible into two new interest bearing debt obligations: the LossCo Note A Indebtedness, bearing interest at LIBOR and ranking pari passu with the general creditors; and the LossCo Note B Indebtedness bearing interest at LIBOR plus X% and ranking junior to the general creditors
• ProfitCo will then exercise this conversion right

Rulings include: the addition of the conversion feature will not result in a disposition of the LossCo Indebtedness provided that there was no novation or rescission of the debt.

An open end (as described in s. 108(2)(a)) mutual fund trust (the Trust), whose units (the Units) trade on an exchange, wishes to qualify as a closed-end mutual fund trust under s. 108(2)(b), in order that it can issue (non-retractable) "Preferred Units" in two series which are effectively inter-convertible.

Unit provisions

Following an amendment of its Declaration of Trust (not described), the Trustees will authorize the issuance of two series of Preferred Units (designated as Series A Preferred Units and Series B Preferred Units). The Series A Preferred Unit provisions may provide for a fixed, cumulative preferential cash distribution payable quarterly (with a specified reset on specified anniversaries based on GOC yields), a right of the holder on each anniversary to have its units reclassified as Series B Preferred Units, a right to be repaid the subscription amount plus accumulated and unpaid distributions (the "redemption amount") on termination of Trust, a redemption right of Trust on specified anniversaries to redeem for the redemption amount, and an absence of voting rights except after specified arrears. The Series B Preferred Unit provisions would be similar except that the distributions would be based on a floating rate. The two series would rank in parity with each other (and ahead of the Units) and would both be listed.

Rulings

Including that the amendment and addition of the Preferred Units will not entail a disposition of units or a resettlement of the Trust or disposition of Trust property.

Comment

It is our preliminary view that at the time of reclassification or an exchange of the Preferred Unit from a Series A Preferred Unit to a Series B Preferred Unit, or vice versa, the event would likely result in a taxable disposition at that time.

An open end (as described in s. 108(2)(a)) mutual fund trust (the Trust), whose units (the Units) trade on a stapled basis with a second open-end mutual fund trust (FE Trust), wishes to qualify as a closed-end mutual fund trust under s. 108(2)(b), in order that it can issue (non-retractable) "Preferred Units." The retraction right of the existing units will be eliminated. For the closed-end qualification steps, see summary under s. 108(2)(b), and for a description of the Preferred Units, see the summary under s. 104(7.1).

Ruling that the issuance of the initial series of Preferred Units will not result in a disposition by any Unitholder of its beneficial interest in Trust, provided the rights attaching to those Preferred Units are based on current market conditions at the time of the offering. The summary states:

No cash consideration or other proceeds of disposition will be received by the unitholders in respect of the diminishment of their rights as a consequence of the amendments. Moreover, the changes to the trust deed in this case, as a whole are not viewed as sufficiently material to take the position that the amended units would be proceeds of disposition.

Respecting a question as to whether the amalgamation of two non-resident corporations holding the shares of a Canadian subsidiary would be a disposition giving rise to the application of s. 116, CRA stated:

the Canadian income tax treatment of an amalgamation that does not qualify as an amalgamation under section 87 of the Act will be determined substantially by the legal consequences flowing from the corporate law under which the predecessor corporations are amalgamated. Where the applicable corporate law provides that the predecessor corporations involved in the amalgamation cease to exist, and that a new corporation is formed on the amalgamation, the predecessor corporations will generally be considered to have disposed of any property held immediately before the amalgamation. However, where the applicable corporate law suggests a "continuation type" amalgamation, the predecessor corporations will generally not be considered to have disposed of any assets that they held immediately before the amalgamation.

Respecting the treatment of a usufruct created in a foreign jurisdiction such as under the French Civil Code, CRA stated (TaxInterpretations translation):

Where a usufruct is not governed by the laws of Quebec, subsection 248(3) is not applicable. Consequently, in the situation of a usufruct governed by the French Civil Code, we are of the view that the creation of such usufruct would not generally be treated as the creation of a trust under Canadian tax law.

In this context, it would be necessary to determine if the creation of the usufruct entailed a disposition for purposes of the Act. This determination should be made in the light of the treatment under the laws of the foreign jurisdiction of the division of the ownership rights.

An investor holds shares of Corporation Y in street name. His shares of Corporation Y listed on the TSX are exchanged by a broker, in an off-market transaction as required by securities regulations, and effected through a log or journal entry ("entrée dite journal"), for identical shares which are listed on the NYSE, so that the investor's shares pass from a Canadian to an American account. After quoting IT-448, para. 9, 14, CRA stated (TaxInterpretations translation):

[W]e are of the view that since the rights and privileges attaching to a share of Corporation Y quoted on the New York Stock Exchange are the same as those attaching to a share of Corportion Y quoted on the Toronto Stock Exchange, the exchange of a share of quoted on the Toronto Exchange for a share of Corportion Y quoted on the New York Exchange would not constitute a disposition for purposes of the ITA.

Notwithstanding the cancellation of IT-133, CRA confirms the continuation of its policy in that Bulletin that the date of disposition of shares is deemed to occur on the settlement date as determined under the rules of the relevant stock exchange. (Typically, the "settlement date" on a disposition of shares is two to three days subsequent to the trade date.) "A disposition does not take place until the vendor is entitled to the proceeds of disposition (on the settlement date)."

a Japanese company (Opco 1) merged with its Japanese subsidiary (Opco 2) and grandchild Japanese subsidiary (Opco 3) in a merger by absorption (kyusu gappei) under which Opco 1 was the surviving entity and Opco 2 and 3 were dissolved. As this was not a continuation type of amalgamation described in The Queen v. Black and Decker, [1975] 1 S.C.R. 411 (two streams coming together but continuing to exist) Opco 2 was considered to have disposed on the merger of its shares of two Canadian subsidiaries, thereby realizing the accrued gains on those shares.

Based on the Exchange Traded Receipts of the Royal Canadian Mint representing undivided legal and beneficial interests in gold bullion and on the statement in IT-387R2, para. 4 that an exchange of gold certificates for gold bullion is not considered to be a disposition, the exchange of such ETRs for gold bullion might not be considered to be a disposition. However, a redemption of ETRs for cash likely would be a disposition.

Where there is an exchange of 100 common shares in the capital of a corporation for 100 "new" common shares in its capital, there would "not necessarily" be a disposition of the old common shares (given that the share rights are identical), so that the s. 85(1) election is unavailable.

The rights of the taxpayer under a support agreement, which provided for the payment to it in the specified circumstances of a break fee, constituted property. Accordingly, the break fee received by it constituted proceeds of disposition of property.

A Canadian holding company will enter into an arrangement for the monetization of some of its shares in a Canadian public company ("ACo") under which it will enter into a forward agreement for the sale of the shares to a financial institution ("IF") and also receive an interest-bearing loan from IF, with the shares being pledged to IF under a hypothec. One of the purposes of the arrangement is to permit Mr. X to maintain control over the voting rights attached to the ACo shares for reasons that are redacted from the published ruling.

CRA ruled inter alia that the arrangements would not cause a disposition of the subject shares of ACo nor would s. 245(2) be applied.

The rights of the taxpayer under a support agreement, which provided for the payment to it in the specified circumstances of a break fee, constituted property. Accordingly, the break fee received by it constituted proceeds of disposition of property.

In order to permit some unitholders (who have US dollars to invest) to achieve a return in US dollars that is the same as the Canadian market return without being affected by the US/Cdn. FX rate, various mutual fund trusts will issue a "Series USD" (with subscriptions and distributions payable in US dollars) and purchase currency forward contracts (with resulting gains or losses being allocated to the holders of the Series USD, but with the NAV being determined in a similar manner to the existing series) to accomplish this end. Conversely, each fund will issue "Hedged Series" which, through the purchase of related currency forward contracts, will generate foreign market returns for those with Canadian dollars to invest which are neutral to fluctuations in the Canadian dollar compared to the relevant foreign currency. The existing declarations of trust provided that units of a fund may be divided into two or more series that are identical to other units except for "certain" variations respecting rights inter alia to distributions.

Rulings that these changes to not result in dispositions at the unitholder or fund levels "provided that the rights...attaching to [the new series] are based on current market conditions at the time of the offering."

Proposed transactions

BV, which is a private limited liability company under Dutch law, will convert into a Dutch cooperative ("DC") pursuant to the Dutch Civil Code. By virtue of the execution of the notarial deed effecting the conversion before a notary, DC will be regarded as a legal entity under the Dutch Civil Code that continues to exist separate and apart from its shareholders.

Ruling

On its conversion into DC, BV will not be considered to have disposed of any of its property for the purposes of the Act.

A variation of a trust indenture to ensure compliance with IFRS would not result in a disposition by the trust of its assets, or a disposition by existing unitholders.

The trustees of a fully discretionary trust that is resident in Canada for the purposes of the Act, applied, with the consent of all the beneficiaries of the trust, to the courts to have the trust deed amended to add a new beneficiary, with the court allowing such addition.

(a) If the new beneficiary is a corporation all of whose shareholders are the original beneficiaries of the trust, does this amendment to the trust indenture result in the original beneficiaries disposing of their interest in the trust?

(b) If the new beneficiary is a corporation in which a majority of the voting and participating shares are held by persons other than the original beneficiaries of the trust, is there a disposition by the original beneficiaries of their interest in the trust?

CRA responded:

(a) … [T]his amendment to the trust indenture results in a partial disposition of the capital and income interests in the trust held by the original beneficiaries.

Since … paragraph 69(1)(b) is applicable in this case, the original beneficiaries will be deemed to have received, as a result of the partial disposition of their interests, consideration equal to the fair market value of those interests. …

(b) In the event that the courts approve the addition of a beneficiary that is a corporation in which a majority of the voting and participating shares are held by persons other than the original beneficiaries of the trust, it would first have to be determined whether the change is significant enough to give rise to a new trust and, consequently, to a disposition of all the property of the old trust to the new trust.

In the event that the addition of a beneficiary does not result in a new trust, it is our view that the answer to Question (a) would also apply to Question (b).

The taxpayer purchased assets from the vendor (apparently, a non-resident) in consideration for shares of the taxpayer and interest-bearing debt, that was evidenced by a note providing that unpaid interest could be added to the principal of the note. This was done, and a new note subsequently was issued for the amount of the original indebtedness plus the capitalized interest. Did this constitute a payment by novation?

After quoting from Quebec commentary that “[a]s a general rule, the mere delivery of a promissory note does not entail novation of the pre-existing obligation” and the “promissory bill is then considered as a simple means of acknowledging the debt,” CRA stated:

[T]he issuance of the note … did not constitute a payment and that there was no novation of the original debt by reason of the issuance of this second note.”

After quoting from Québec Cartier, CRA concluded that “the Taxpayer did not pay the increased and annually capitalized interest and did not credit the Vendor with such interest when the [new] note … was issued.”

A partnership has several members, some of whom hold partnership interests which participate in both income and capital of the partnership. The partnership agreement will be amended to provide for the issuance of two partnership interests: the first, to provide for participation only in income; and the second, to provide for participation only in capital. Would there be a disposition where an existing interest is converted or split up into a capital and income interest?

After noting that s. 97(2) permits a taxpayer to dispose of property on a tax-free basis to a partnership if, among other things, the taxpayer is a member of the partnership immediately following the disposition, CRA stated:

[T]here would be a disposition of the initial interest if the interests in income and in capital received in consideration had rights and characteristics sufficiently different to be distinguishable from those of the initial interest. If this difference does not exist, we consider that there would not be a disposition and subsection 97(2) could not apply.

It should be noted that the totality of the interests of a partner held in a partnership constitute a single property of the partner and represent its interest in the partnership for purposes of the Act.

The shares of a U.S. corporation (D Co) holding two Canadian subsidiaries (G Co and H Co) whose shares are taxable Canadian property are contributed by its U.S.-resident parent (B Co) to a U.S. affiliate. D Co then is converted under the Delaware corporate law into an LLC.

Rulings that "D Co will not be considered to have disposed of its shares of G Co or H Co as a result of its conversion from a corporation to an LLC…" and "following its conversion…D Co will be considered to be the same corporation that it was prior to the conversion."

Where a Delaware LLC governed by the Delaware Limited Liability Company Act is converted into a limited partnership pursuant to s. 17-217 of the Limited Partnership Act, there will be considered to be a disposition of the property of the LLC and of the shares in the LLC.

The sole trustee (the Trustee) of a family trust who also was one of the "Existing Beneficiaries" exercised a power under the Trust Indenture to add beneficiaries to the Trust who were unrelated to the Existing Beneficiaries. The Trustee then resigned and a replacement trustee became trustee. The Trust protector then removed the replacement trustee and appointed a corporation resident in Canada as trustee.

After noting that the interest of the beneficiary of a discretionary trust "is essentially a right… to be considered by the trustee as to whether or not any trust property…should, in the trustee's discretion, be distributed…see Gartside v. I.R.C., [1968] A.C. 553 (HL)," CRA stated:

When additional beneficiaries are added to a trust, whether as a result of a variation of the trust or pursuant to the terms of the trust, the rights of the existing beneficiaries...are arguably diminished and as a result, each of the existing beneficiaries realizes a disposition of a part of the bundle of rights that forms his or her interest in the discretionary trust….[However,] the addition of the New Beneficiaries will not result in any actual or deemed proceeds of disposition in respect of that disposition other than to the Existing Beneficiary who is the trustee of the Trust.

However, as the trustee

is also a beneficiary of the Trust who has realized a disposition of a part of his interest in the Trust as a result of the addition of the New Beneficiaries, we believe that a reasonable argument can be made to apply subparagraph 69(1)(b)(ii) to the portion of his interest that has been disposed….[W]e suggest that you contact the Valuation Services Section….

The transfer of silver bullion to a trust which was designed to reflect the price of silver likely would give rise to a disposition, but further particulars would be needed to comment more definitely.

A Canadian-controlled private corporation demolished a building on its land. CRA, without a need to cite BCN in support, accepted that this entailed a disposition of the building so as to engage s. 13(21.1)(b).

With respect to an inquiry as to whether a capital loss could be claimed on a partnership interest in circumstances in which unsuccessful attempts had been made to have the unit holders vote on a formal dissolution of the partnership, CRA stated that "in our view, the dissolution of a partnership could trigger the disposition of the partnership interest in a partnership for nil proceeds of disposition".

Regarding the consequences of the renunciation by the beneficiary of a testamentary spousal trust of all entitlements under the trust (other than income that has accrued to date) without consideration, CRA stated:

[The] definition of disposition is not exhaustive. Consequently, transactions other than those specifically mentioned in the definition can be considered as dispositions. We are of the view that a renunciation made pursuant to article 1285 C.C.Q. constitutes an extinguishment of rights and, as such, constitutes a disposition.

The residual beneficiaries of the trust, who are prohibited by the trust terms from receiving any distributions during the spouse’ lifetime, then obtain a court order to permit distributions to them prior to the spouse’s death. CRA stated:

The amendment to the trust indenture that would be granted to allow for the distribution of the property would not, in and of itself, result in a disposition of the trust property or by those beneficiaries.

The amendment of a trust indenture for a trust of which a corporation was the sole beneficiary to delete all references to units (so that the trust ceased to be a unit trust in form and establishing that it was a personal trust) would not cause a resettlement of the trust's property.

Based on a representation that under the relevant provincial law this would not result in a novation of the debt or cause its repayment or the creation of a new obligation in its place, ruling that the addition of a conversion feature to a debt obligation would not result in its disposition or in the creation of a new debt obligation.

A revival of a corporation under the CBCA would appear to have retroactive effect and the revived corporation will generally have all the rights (including tax attributes) and obligations that it would have had if it had not been dissolved.

A mutual fund trust wishes for there to be better controls to avoid becoming majority-owned by non-residents and potentially losing its MFT status in light of s. 132(7). Ruling that the redesignation (pursuant to amendments of the trust indenture) of existing units of a mutual fund trust into into units of two classes with substantially the same rights as the existing units, namely, Class 1 units (which may be held by non-residents and which will be convertible into Class 2 units only be Canadian residents), and Class 2 units (which may only be held by residents and are listed only on a Canadian exchange and may be convertible into Class 1 units) and will always exceed the number of Class 1 units, will not result in a resettlement of the trust or a disposition of the existing units.

Conversions of corporations incorporated under the laws of Delaware and California into limited liability corporations (so that they can be held as indirect subsidiaries of a U.S. REIT in an "UPREIT" structure) would not result in dispositions at the shareholder or the entity level, given that the conversions would be similar to corporate continuances in Canada (i.e., the California corporate law provides that "the conversion shall not constitute a dissolution of such corporation and shall constitute a continuation of the existence of the converting corporation in the form of the applicable other entity of that State," and similarly for Delaware.

An individual transfers his 100 common shares of a corporation to the corporation in consideration for 500,000 preferred shares and 100 common shares of the corporation, with the 100 common shares previously held by him being cancelled. Because such transaction would not involve any change to the bundle of rights represented by the common shares held by the individual both before and after the transaction, this transaction would not entail a disposition of his 100 common shares. The transaction instead would be regarded as involving nothing more than the issuance by the corporation of 500,000 preferred shares. S.84(1) could apply to such an issuance. CRA stated:

The CRA's longstanding position on the concept of disposition in situations similar to the Particular Situations is to focus on the nature of the changes made to the shares of the capital stock of a particular corporation rather than the method by which the changes are accomplished. Our approach is based on the fact that we consider a shareholder's interest in a corporation to be an intangible asset, consisting of a bundle of rights and privileges attached to the shares granted by the articles of incorporation and the relevant corporate laws. Thus, a particular transaction in a particular share of the capital stock of a particular corporation held by a taxpayer may not constitute a disposition where, after the transaction, the taxpayer is left with another share of the capital stock of the particular corporation that has identical rights, privileges, restrictions and conditions as the rights, privileges, restrictions and conditions attached to the particular share.

A change in the ownership by a brother and sister of land and building from tenants in common to joint tenants would not, by itself , result in a disposition.

Marren v. Ingles (1980), 54 TC 76 (HL) was applied to conclude that where on the termination of an equity swap agreement between the taxpayer and a financial intermediary the rights of both parties were extinguished, the payment of the swap termination payment by the taxpayer would occur as the result of the surrender ("l'abandon") of such rights, thereby establishing that there was an associated disposition.

CRA was not prepared to confirm (and in fact doubted) that the conversion of a Delaware limited liability company into a limited partnership governed by the Delaware Revised Uniform Partnerships Act and Limited Partnerships Act would not result in a disposition of the shares of the LLC and of its property, stating that Ruling 9922923 found:

[A] conversion from a corporation governed by the Delaware General Corporation Law (the "DGCL") to an LLC does not result in a disposition of the shares of the DGCL or its underlying assets. At this time we are not prepared to extend the principles in the ruling to your request because the conversion in the ruling was from one corporation to another and the conversion in your request is from a corporation to a limited partnership.... Also, the position stated in Ruling 9922923 is currently being revisited

A great-grandchild foreign subsidiary ("Dco") of a Canadian public corporation ("Aco") and a great-grandchild foreign subsidiary of Aco ("Fco") held through another chain of corporations each hold ownership interest ("quota") in another foreign affiliate of Aco ("Eco"). The two quota holders of Eco agree that the principal assets of Eco will be assigned to a newly-incorporated corporation in the same foreign jurisdiction ("Jco") for no consideration; but that contemporaneously with the creation of Jco and the assignment of property of Eco to Jco, the capital account and retained earnings of Eco will be reduced and added to the capital and retained earnings of Jco (which is owned by Dco and Fco in the same proportions as they owned, and continue to own, Eco).

The reduction in the capital account and retained earnings of Eco will not result in a disposition by Dco of any portion of the Eco quota held by it at the time of this reorganization.

Where a Japanese parent merges with his Japanese subsidiary which, in turn, holds shares of a Canadian company, the Japanese subsidiary will not be considered to have disposed of its assets, including the shares of the Canadian company, if the applicable corporate law in Japan is of a "continuation type". However, there may be a disposition of the share in the Japanese parent and subsidiary by the respective shareholders as a result of the merger before taking into account the possible effect of the addition of paragraph (n) to the definition of disposition.

A Canadian public company ("Pubco 1") carries out a share consolidation under which each 100 pre-consolidation shares are replaced by one post-consolidation share and with each fractional post-consolidation share being repurchased for cash not exceeding $200.

"The dispositions, by the shareholders of Pubco 1, of the post-consolidation fractional Pubco 1 shares, will not, in and by themselves, cause the share consolidation ... to fall outside the circumstances described in Interpretation Bulletin IT-65. However, the shareholders of Pubco 1 should report any gain or loss, realized or incurred by them from the disposition of their fractional shares."

Addition of retraction right

Articles of Amendment will be filed so that the common shares of a taxable Canadian corporation (Aco) will be retractable with a view to it qulifying as a mutual fund corporation. The aggregate Retraction Price payable by Aco in respect of any Common Shares tendered for retraction will be satisfied by payment in cash or in specie in the form of promissory notes (the "Retraction Notes"). Whether the Retraction Price is paid in cash or by Retraction Notes shall be at the option of Aco. Because of the illiquid nature of the Aco's (mostly real estate) assets, the Retraction Notes will allow Aco sufficient time to sell and convert to cash such of its assets as it deems necessary to satisfy the Retraction Price.

Ruling

Amendment does not result in a disposition of those shares.

On a short-form vertical amalgamation pursuant to the Ontario Business Corporations Act "since the shareholders of the parent corporation become shareholders of Amalco as a matter of law, and Amalco is not the same entity as the parent corporation, we are of the view that the shares of the parent are converted into shares of Amalco because of the short-form vertical amalgamation for the purposes of subparagraph (b)(iii) of the definition of 'disposition in subsection 248(1)".

The determination of whether a contract is a lease or a sale is based on the legal relationships created by the terms of the particular agreement, rather than the underlying economic realities.

The exchange of voting common shares of the capital stock of a corporation for voting preferred shares and non-voting common shares of the same corporation, with such voting common shares being cancelled, constituted a disposition for the purposes of s. 85(1), so that the s. 85(1) election could be made.

CCRA indicated that there would be no disposition of the taxpayer’s lands on which there were unpaid municipal taxes until the municipality sold the land under its statutory authority.

Ms. A is one of the three limited partners in a limited partnership (the "LP"). Her 33 units entitle her to 1/3 of the value of the shares, 3/4 of the value of the land and 1/3 of the value of the buildings held by the LP.

In order that Mr. X can purchase Ms. A's interest in such shares, the partnership agreement is amended to create three new classes of units with respective entitlements to the three types of property, so that Ms. A's units are exchanged for 33 units giving rights in shares, 72 units in land and 33 units in buildings. Ms. A then sells her 33 units respecting shares to Mr. X.

CCRA indicated that such exchange would not constitute a disposition of her interest (and that there was no transfer of her interest for purposes of s. 97(2),) given that “the exchange … serves to isolate the units relating to the rights in the shares that Ms. A wishes to sell but should not change the proportion in the various assets to which the three limited partners had rights before the exchange.”

In declining to opine on the tax consequences of the continuance of a corporation as a cooperative, CCRA indicated that such consequences “vary depending, among other things, on the facts and the specific terms of the articles and accompanying documents, as well as the terms of conversion of shares and shareholders' rights.”

S.49(3) did not apply to deem the exercise of employee stock options held by a non-resident former employee to not be a disposition of the options, given that s. 49(3) applied only to capital property, whereas employee stock options are governed by s. 7. However, there was no liability under s. 116(5) to the Canadian corporation that had issued the options as it should not be considered to have acquired the options from the employee and, therefore, had no cost therefor. CRA stated "this is analogous to a situation where a debtor repaid his debt and the debt ceased to exist. That is, the CRA would generally recognize the settlement or extinguishment of the debt as a disposition of property by the creditor but not an acquisition of property by the debtor".

The Directorate referred to an earlier ruling on a treaty co-production where the U.K., and qualified corporation, co-producers each held a master negative and the qualified corporation granted the U.K. corporation a licence to its rights, as co-owner, to license or otherwise exploit the production throughout the world, except in Canada and retained ownership of its copy of the original master negative, ownership of all its rights in its share of the copyright in the production and all its rights to exploit the production in Canada. The U.K. corporation sold its original master negative to a U.K. partnership and granted it a licence for the right to exploit the production outside Canada, but with the U.K. corporation retaining ownership of its share of the copyright in the production. The partnership leased the original master negative to the U.K. corporation and granted the U.K. corporation a licence to all the rights it acquired through the licence granted to it by the U.K. corporation.

The U.K. corporation granted a licence to the Canadian qualified corporation so that the qualified corporation obtained the same rights that it had granted to the U.K. corporation through the first licence.

The Rulings Directorate ruled that the licence granted by the qualified corporation to the U.K. corporation did not constitute a disposition by it of the copyright in the film or video production (a position which CCRA now confirmed).

A change in the interest rate and the dates on which principal repayments were required to be made did not result in either a disposition of a debt obligation or the issuance of a new obligation for purposes of s. 212(1)(b)(vii) given that these amendments were made pursuant to a clause in the trust indenture that empowered note holders to approve by extraordinary resolution "any change whatsoever in any provisions of" the Trust Indenture, and on the basis of a representation that such changes would not result in a novation, or a discharge, rescission or extinguishment of any portions of the notes under the relevant provincial law.

Regarding whether there is a disposition when a taxpayer transfers mutual fund units held in a taxable account with one financial institution to taxable account at another financial institution, so that there is a change in the administrator, CCRA stated:

To the extent that a change in the administrator of an account in which mutual fund units are held does not entitle the owner of such units to proceeds of disposition of property and does not result in a change in the beneficial ownership of such units … such a change generally does not constitute a … “disposition” … .

Before concluding that the changes, taken together, effected by a "Second Modification of the Original Lease" would be considered to be new conditions which "substantially affected the basic elements" of the Original Lease and, therefore, would give rise to a disposition of the Original Lease and an acquisition of a new lease, the Department noted that the approach in IT-448 applies to lease agreements.

In response to a general question as to "whether a change in the terms of a debt obligation would result in a disposition of the existing obligation and the substitution of a new obligation in its place," CRA stated:

"If, in accordance with the relevant contract law in Quebec, the changes in the terms of the original debt obligation have resulted in a novation (where the original debt obligation is discharged and substituted by a new obligation), it is appropriate to view the original obligation as having been disposed of for income tax purposes. In the other provinces, a rescission of a debt obligation will be implied when the parties have effected such an alteration of its terms so as to substitute a new obligation in its place, which is entirely inconsistent with the old obligation or if not entirely inconsistent, inconsistent with it to an extent that goes to the very root of it. In such a case, it is appropriate to view the original obligation as having been disposed of ... ."

In connection with refusing to rule because the proposed transactions related to a wide range of funds for which documentation had not been provided, CCRA went on to provide general comments. When units of a class or series of a mutual fund trust are changed (i.e, reclassified or redesignated) to another class or series of the same mutual fund trust, there is no disposition if the trust agreement provides that more than one class or series of units may be issued by the fund and it makes provision for changes between classes or series of units of that fund.

Inherent in these rulings was our understanding that the attributes of each class or series of units of a particular fund were substantially the same (even though each class or series may have different investment requirements), the unit holders would not be entitled to proceeds of disposition for the units, and the redesignated or reclassified units would not be cancelled or redeemed. Also, the fact that a unit holder may have to pay an initial sales charge or a deferred sales charge in respect of the redesignated or reclassified units did not alter our view that there was not a disposition of units.

A US-resident corporation ("Absorbco") merges into its US-resident parent corporation, with Absorbco surviving the merger. Three other US-resident corporations (which are now sisters) then are merged into Absorbco, with Absorbco also surviving the second merger.

There is no disposition of the taxable Canadian property held by Absorbco on both mergers, whereas the merging corporations dispose of their assets at fair market value under s. 69(1)(b).

"The proposals include amendments to a declaration of trust and the execution of an instrument pursuant to the declaration of trust which will permit the mutual fund trusts to rename their existing units; create two new classes of units; and add a redesignation feature to each class of units which, in certain circumstances, will allow these units to be redesignated as another class of units of the same fund." Rulings that these actions will not result in a resettlement of the funds, or a disposition of the trust funds or of outstanding units, and that s. 104(7.1) will not apply.

Net realized capital gains of a mutual fund for a year would be due and payable to the unitholders but reinvested automatically on the unitholders' behalf in additional units.

Ruling that the consolidation of the number of Units outstanding immediately after the reinvestment so as to equal the number of Units outstanding before the issue of Units on reinvestment would not result in a disposition of the Units.

The addition of a redemption feature to a unit trust and an expansion of its investment objectives would not result in a disposition of either trust property or the units of the trust.

An amendment to the declaration of trust governing a unit trust to provide that the units may be redeemed on demand would not, by itself, result in a disposition of the units.

Ruling that the expansion of the investment objects of a unit trust and the addition of a redemption right would not give rise to a disposition of the units.

The conversion of a Delaware corporation into a Delaware LLC would not result in a disposition of its assets or of shares in its capital.

The addition of a redemption feature to a unit trust and an expansion of its investment objectives was ruled not to give rise to a disposition of either trust property or the units of the trust.

Normal commercial distribution arrangements for films do not result in a disposition of a portion of the copyright in the production held by the producer.

A Canadian producer would be considered to have disposed of a portion of its beneficial interest in a television production when it entered into a licence agreement with a broadcaster under which in consideration for a licence fee it agreed to pay the broadcaster 10% of all revenues derived from exploitation of the episodes, merchandise and ancillary products throughout the world in perpetuity with the broadcaster, in addition to receiving broadcasting rights, receiving other rights including ICRS rights, merchandising rights and development rights but without any transfer of copyright ownership.

The conversion of ownership of personal use real estate from a joint tenancy to a tenancy in common would not constitute a disposition or a partition.

Income Tax Technical News, No. 7 gives a general indication of their criteria that are considered by RC in determining whether a transfer of shares to a voting trust results in a change of beneficial ownership.

An open-end mutual fund, which has one class of unit, currently pays fixed distributions that exceed its annual income. In order to accommodate those investors who do not require distributions in excess of income, the existing units are reclassified as Class A units, new Class B units are provided for having substantially identical attributes, the Class A units are made convertible into Class B units and the Class B units are similarly convertible into Class A units. RC rules that these changes do not result in a disposition of the existing units, and that the conversion of Class A units at the option of the unitholder into an equivalent value of Class B units and the conversion of Class B units at the option of the unitholder into an equivalent value of Class A units will not result in a disposition of the units.

RC followed Amirault v. MNR, 90 DTC 1330 (TCC) in indicating that a reduction in the exercise price for an employee stock option would not represent a disposition.

General discussion of the circumstances in which a lease will be treated as an acquisition or disposition of property.

Where, after a partnership holding shares has been dissolved in compliance with s. 98(3), each former partner surrenders an undivided interest in each of its shares and receives a certificate representing ownership of an equivalent number of whole shares, the partition process will not be considered to constitute a disposition.

In finding that the shares of a UK subsidiary were disposed of when the shares were cancelled on completion of voluntary dissolution proceedings CRA stated:

[I]t would be inconsistent with the spirit of the law to consider the disposition of the shares of a controlled foreign affiliate to have occurred as soon as the shareholders become eligible for partial proceeds of disposition on a wind-up because not only is it impossible to compute the full amount of the gain at that time, any FAPI that may be earned by the affiliate subsequent to that time presumably could not be considered to be in respect of shares owned by the taxpayer for the purposes of subsection 91... .

Where legal title to a property is transferred to a bare trust without a corresponding transfer of beneficial ownership, there is no disposition of property.

The Directorate found that an amendment of a term life insurance policy to decrease the premiums and the insured amount appeared not to give rise to a new obligation under the civil law nor appeared to be intended to create a new policy and, thus, did not give rise to a disposition under s. 148(9).

"Generally the date of disposition of property is the date on which beneficial ownership passes to the purchaser and the vendor has an absolute but not necessarily immediate right to be paid."

Where a gold certificate evidencing ownership of a stated amount of gold bullion and that is held as capital property is exchanged for the corresponding amount of bullion, there will not be considered to be a disposition for purposes of the Act, as stated in IT-387R2, para. 4.

The transfer of property from one health and welfare trust into a new health and welfare trust will not result in a disposition where the new trust has the same terms as the old trust except for administrative matters, such as the number of meetings to be held and how the meetings are to be conducted. In addition, provisions for naming replacement trustees, or extending or amending powers of trustees, would not normally create a taxable event.

Where the taxpayer has the right in accordance with IT-426 to use the cost recovery method for reporting the gain on a disposition of shares but elects instead to report the estimated total proceeds of disposition and to claim a reserve under s. 40(1)(a)(i), each year's earn-out rights would be considered a separate capital property having an ACB equal to its fair market value on the date of disposition. At the end of each year, that year's earn-out rights would be considered to have been disposed of for proceeds of disposition equal to the amount received or receivable for that year (thereby resulting in a capital gain or loss that was separate and distinct from the capital gain or loss on the prior disposition of the shares).

Gains from the disposition of the earn-out rights would not qualify for the enhanced capital gains exemption.

It is not possible at law for a trust to be created on a settlement of property on it where the trust simultaneously issues a promissory note to the settlor equal to the fair market value of the property

"A disposition takes place when a share is cancelled during the process of a voluntary dissolution of a corporation pursuant to clause 54(c)(ii)(A) of the Act. Even if the shares were not cancelled before the dissolution, the Department is prepared to accept that there has been a disposition of the shares of the corporation by a shareholder for the purposes of section 88 of the Act where the corporation has been wound up and the shareholder has received his portion of any final liquidating distribution by the corporation."

Where a non-resident co-tenant of Ontario real property transfers her interest in the property to a non-resident revocable trust, retaining for herself a life interest in the revocable trust, there will be a change in the beneficial ownership of the property, with the result that the exemption in s. 54(c)(b) will not be available.

Where a subscriber to an RESP names another person's child as a beneficiary in consideration of the receipt of a lump sum, the subscriber will thereby be disposing of a property giving rise to a capital gain.

There will be no deemed disposition of property on the distribution of taxable Canadian property to a non-resident beneficiary on the winding-up of a non-resident trust, based on the definition of "taxpayer" in Oceanspan Carriers Ltd. v. The Queen, 87 DTC 5102 (FCA).

The cancellation of a lease by a tenant and the tenant's continued occupation of the premises on a periodic tenancy does not entail a disposition of the tenant's leasehold interest.

Where a taxpayer receives treasury preferred shares of a corporation in consideration for the disposition to the corporation of its common shares, a question may arise as to whether there has been a disposition if the preferred shares are convertible to common shares.

The disposition on the winding-up of a wholly-owned foreign subsidiary of its shares will occur when the parent becomes entitled to receive the assets as part of the dissolution proceedings although, administratively, RC will permit the disposition to be considered to have occurred on the dissolution in cases where the formal dissolution followed the distribution of the property of the subsidiary within a reasonably short period of time.

An Alberta general partnership (comprised of two Canadian corporations and owning and managing Canadian real estate) will be continued to a U.S. state as a limited partnership in order to admit some individual U.S. investors as limited partners. Would their admission or the change in law result in a dissolution of the partnership and a deemed disposition of the partnership interests by the partners? Revenue Canada responded:

In general, the conversion of a general partnership to a limited partnership does not result in a disposition of the partnership interests of the general partners who become limited partners provided:

1. there has been no significant change in the rights and obligations of the partners other that the decrease in the potential liability of the general partners who become limited partners and the increase in the potential liability of the general partners who remain as such; and
2. the law governing the partnership does not operate to cause a dissolution of the general partnership, when there is a conversion to a limited partnership.

Significant changes in any of the following areas upon conversion to a limited partnership may result in a disposition of the partnership interests:

1. the contributed capital accounts of any of the partners;
2. the percentage interest in the partnership of any of the partners;
3. the number or identity of the partners;
4. the business of the partnership; or
5. the percentage interest of each partner in the profits; or
6. the percentage liability for losses of each partner, except for the limitation on liability of the limited partners.

In addition to the above, we would need to determine whether the applicable provincial law resulted in dissolution upon the continuation of the partnership in a foreign jurisdiction.

A change from joint tenancy to tenancy in common is not a disposition of property for purposes of ss.54(c), 69(1)(b) and 115(1)(a)(iii).

Where an individual and his spouse have been farming a parcel of land since 1985 and proposed to subdivide the land and sell the lots to their corporation for a promissory note, the taxpayers will have a notional capital gain on the date of conversion from capital property to inventory which occurs when the property is subdivided. However, the taxable capital gains will not arise until the taxation year in which the actual sales of the lots occur, at which time the taxpayers will be required to report the capital gain along with any profit on the sale of the land. The taxpayers will be entitled to claim the qualified farm property capital gains exemption in the year in which the capital gains are reported.

In the context of a proposed winding-up of a law firm, it was noted that when only one property is divided there will not be a disposition.

Because a voluntary partition under Quebec law is not translatory but rather declaratory of title, such partition does not give rise to disposition. Furthermore, property acquired by a co-owner in the course of a licitation is presumed under Quebec law to have always been owned by him and, accordingly, the licitation also does not entail a disposition. However, if the property to be partitioned consists of two distinct masses, and one co-owner receives property for one mass in exchange for his interest in another mass, there will be a disposition.

In a situation where Mrs. A wishes to transfer capital property to a trust of which she was the settlor as well as the income and capital beneficiary and a minority trustee, RC stated that it was of the view "that in order for s. 54(c)(v) to apply, the taxpayer must have capital and income interests in the trust that have rights and attributes that are identical to the rights and attributes relating to the property transferred to the trust."