Principal Questions: Whether or not the cost of the land can be bumped either immediately after the acquisition of control or at some time later even though the land, being capital property to the subsidiary, will be distributed to the parent that is a land developer?
Position Taken: Yes.
Reasons: Assuming that the land was a capital property of the subsidiary at the time that the parent last acquired control of the subsidiary and was owned by the subsidiary thereafter without interruption until such time as it was distributed to the parent on the winding-up, and assuming that subparagraphs 88(1)(c)(iv) to (vi) would be inapplicable, the cost of land could be bumped within the limits established under 88(1)(d), even if the land is not a capital property to the parent.
XXXXXXXXXX 2016-062970
Mr. Séguin
March 30, 2016
Sir,
Subject: Paragraphs 88(1)(c) and (d)
This is in response to your email of January 28, 2016 in which you asked us our view respecting the application of paragraph 88(1)(d) of the Income Tax Act (hereinafter, the "Act ") to a hypothetical situation that you described.
Unless otherwise noted, all statutory references in this document are a reference to a section of the Act or one of its provisions.
This technical interpretation provides general comments about the provisions of the Act, where referenced. It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R6, Advance Income Tax Rulings and Technical Interpretations.
You wish clarification on the interpretation of the Act made by the Canada Revenue Agency respecting a hypothetical situation where a corporation, whose activities are real estate development, wishes to acquire the shares of another corporation in order to wind-it-up it so as to inter alia, make a designation under paragraph 88(1)(d), thereby accessing an increased tax cost under paragraph 88(1)(c) by reference to the amount calculated under paragraph 88(1)(d).
Situation
- Mr. A holds all the shares of Corporation A;
- The only property of Corporation A is land with an ACB of $100,000;T
- This land is (and always has been) a capital property of Corporation A;
- Mr. B holds all shares in the capital of Corporation B and is not related to Mr. A;
- Corporation B carries on a land development business;
- Corporation B acquires all the shares in the capital stock of Corporation A for $500,000 in order to subdivide the property for resale;
- All parties are residents of Canada for purposes of the Act.
Your questions
You wish to know:
1. If Corporation B acquires all shares in the capital stock of Corporation A and Corporation B winds it up immediately, does paragraph 88(1)(d) apply so that the cost of land could be increased to $500,000?
2. Would the answer be the same if the winding-up of Corporation A was effected a several years following the acquisition of the shares in the capital of Corporation A?
Our Comments
The question of whether a property is capital property of a taxpayer is a question of fact to be considered in light of all the circumstances of a given situation. Therefore, we have assumed the correctness of the assumption stated above, that the land held by Corporation A is and always has been capital property to it.
Paragraph 88(1)(c) provides that the cost of property of a subsidiary (other than property that is an interest in a partnership) distributed to the parent corporation on the winding-up is deemed to be the amount that would, but for subsection 69 (11), be deemed by paragraph 88(1)(a) to be the proceeds of disposition of the property plus the amount determined under paragraph 88(1)(d) in respect of the property, if it was a capital property, other than ineligible property, of the subsidiary at the time that the parent last acquired control of the subsidiary and was owned by the subsidiary thereafter without interruption until such time as it was distributed to the parent on the winding-up.
Therefore, to the extent that the land held by Corporation A was capital property, other than an ineligible property, to it at the time that Corporation B last acquired control of it, and the land was owned by Corporation A until it was distributed to Corporation B on the winding-up, the land of Corporation A would be a property whose cost could be increased by the amount determined by paragraph 88(1)(d), notwithstanding that the property in question would not be a capital property to Corporation B, and assuming that subparagraphs 88(1)(c) (iv) to (vi) did not apply in this case.
As for the amount of the increase for the property in question, the general limitations laid down in subparagraphs 88(1)(d)(i), (i.1) and (iii), and the specific limitations laid down for the property in subparagraph 88(1)(d)(ii), should be considered. These limitations consider inter alia the adjusted cost base of the shares of the subsidiary immediately before the winding-up, the net tax equity of the subsidiary immediately before the winding-up, the FMV of the land at the time the parent last acquired control of the subsidiary, and the higher of the cost amount of the land immediately before the time that the parent last acquired control of the subsidiary and the cost amount of the property immediately before the winding-up.
Whether the winding-up of Corporation B takes place immediately after the acquisition of control or several years after the acquisition of control, the land will represent an eligible property for bump purposes but subject to the limitations in the legislative provisions discussed above. The amounts determined by virtue of these limitations will thus vary depending on when the winding-up occurs.
We trust that these comments will be of assistance and please accept the assurances of our highest regards.
Stéphane Charette, CPA, CMA, MBA
for the Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch