Principal Issues: Whether subsection 69(11) would apply in the three scenarios described in the letter?
Position: General comments, but probably no.
Reasons: Conditions in subsection 69(11) appear not to be satisfied.
XXXXXXXXXX 2006-020635 R. Gagnon January 23, 2008
Dear Sir,
Subject: Section 69(11) of the Income Tax Act
This is in response to your email of September 19, 2006 in which you asked us a question regarding the application of subsection 69(11) of the Income Tax Act (the "Act") to the three Scenarios described below.
Unless otherwise indicated, all statutory references herein are to provisions of the Act.
Facts and assumptions
Scenario 1
1. Mr X is the husband of Ms X. Mr Y is the son of Mr X and Ms X. Mr Y is not a minor.
2. Mr. X, Ms. X and Mr. Y are resident in Canada for the purposes of the Act.
3. SOPE is a "general partnership" as defined in the Civil Code of Québec and a "Canadian partnership" as defined in subsection 102(1).
4. Prior to the transfer described in paragraph 5 below, Mr. X and Ms. X each held a 50% interest in the profits, losses and capital of SOPE. The partners of SOPE operated a dairy farm as partners of SOPE from the year 1999 until the transfer of the farm business to Newco as described in paragraph 8 below.
5. In 2004, Mr X and Ms X each transferred to Mr Y a part of their interest in SOPE, being 40% thereof. The transfers were effected as inter vivos gifts. Subsequent to those transfers, Mr Y has had a 40% share in the profits, losses and capital of SOPE, and Mr X and Ms X each have a 30% share in the profits, losses and capital of SOPE.
SOPE continued to exist when Mr. Y became a partner in SOPE. Mr. X and Ms. X transferred part of their interest to Mr. Y in order to integrate their son into a farming business carried on by the SOPE partnership.
6. At the time of the transfers, each of Mr. X's and Ms. X's interests in SOPE was an "interest in a family farm partnership" of the individual within the meaning of the definition in subsection 70(10). In your view, subsection 73(4) was applicable to Mr. X, Ms. X and Mr. Y in respect of each of the transfers in 2004 by Mr. X and Ms. X to Mr. Y of a portion of their interest in SOPE.
In your view, the proceeds of disposition for each of Mr. X and Ms. X of the portion of their interest in SOPE that was transferred in 2004 to Mr. Y, was the adjusted cost base ("ACB") of their interest in SOPE. The fair market value ("FMV") of each of Mr. X's and Ms. X's interests in SOPE at the time of the 2004 transfers was greater than their ACB.
7. In 2006, a new corporation ("Newco") was incorporated. Newco is a "Canadian-controlled private corporation" as defined in subsection 125(7) and a "taxable Canadian corporation" as defined in subsection 89(1).
8. In 2006, the assets used in the farming business of SOPE, other than certain land and buildings, were transferred to Newco. As consideration, Newco issued to SOPE common shares of its capital stock and a note payable to SOPE, and assumed the debts of SOPE's business other than those debts that related to the assets that were not transferred to Newco. SOPE has retained land and buildings which are leased by SOPE to Newco.
9. Newco and the partners of SOPE jointly made an election under subsection 85(2) in respect of the eligible property (as defined in subsection 85(1.1)) that was transferred to Newco, in the prescribed form and within the time limit set out in subsection 85(6).
The amount agreed to by the parties for the purposes of subsection 85(2) in respect of each of the properties transferred to Newco, other than certain "qualified farm property" ("QFP") as defined in subsection 110.6(1), was an amount that allowed the property to be transferred tax-free. The amount agreed to by the parties in respect of certain qualified farm property was determined so that SOPE would realize taxable capital gains on the transfer of such qualified farm property to Newco.
10. The taxable capital gains realized by SOPE as a result of the application of subsection 96(1) have been allocated to the three partners of SOPE in accordance with their percentage ownership of SOPE.
11. Each of the partners of SOPE claimed a capital gains deduction under subsection 110.6(2) in respect of their share of the taxable capital gains of SOPE attributable to the disposition of qualified farm property.
Scenario 2
The facts and assumptions described in paragraphs 1 to 7 and 9 to 11 of Scenario 1 above are also applicable to Scenario 2.
Paragraph 8 of Scenario 2 is as follows:
In 2006, all property used in SOPE's farming business were transferred to Newco. As consideration, Newco issued to SOPE common shares of its capital stock and a note payable to SOPE, and assumed all debts of SOPE's business. SOPE was not liquidated or dissolved.
Scenario 3
The facts and assumptions described in paragraphs 1 to 7 and 9 to 11 of Scenario 1 above are also applicable to Scenario 3.
Paragraph 8 of Scenario 3 is as follows:
In 2006, all property used in SOPE's farming business was transferred to Newco. As consideration, Newco issued common shares of its capital stock and a note payable, and assumed all debts of SOPE's business. SOPE had no debt after the transfer.
In addition, the following transactions were carried out shortly after the transfer of SOPE's farming business to Newco:
12. The partners of SOPE agreed to liquidate and dissolve SOPE.
13. Pursuant to an agreement entered into by the partners of SOPE, all of the property of SOPE was allocated to the partners immediately before it ceased to exist, so that each of the partners received the following property: (a) a number of common shares of the capital stock of Newco equal to the number of common shares of the capital stock of Newco held by SOPE multiplied by the partner's percentage interest in SOPE, and (b) an undivided interest in the note receivable from Newco, which, when expressed as a percentage, corresponded to the partner's percentage interest in SOPE.
The provisions of section 85(3) applied to the liquidation of SOPE.
14. SOPE was dissolved.
Your Question
Would subsection 69(11) apply in each of the three Scenarios described above in respect of the transfer in 2004 by Mr. X and Ms. X to Mr. Y of part of their interest in SOPE?
Our Comments
It appears to us that the situations described in your letter may be actual situations involving taxpayers. The Canada Revenue Agency ("CRA") does not generally provide written opinions on proposed transactions otherwise than by way of advance ruling. Furthermore, it is the responsibility of the relevant Tax Services Office to determine whether completed transactions have received appropriate tax treatment. We can, however, offer the following general comments which may not apply in full to the situation submitted.
It appears to us that, in order for subsection 69(11) to be applicable in the Scenarios described above in respect of a taxpayer's transfer of a partnership interest, it would be necessary, inter alia, that the deduction for a person (other than a person that would be affiliated with the taxpayer immediately before the series began, if section 251.1 were read without reference to the definition of “controlled” in subsection 251.1(3)) in computing taxable income would have to be in respect of a subsequent disposition of the partnership interest or a replacement property, which does not appear to be the case in the three proposed Scenarios.
Please note that this opinion is not an advance ruling and, as stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, it is not binding on the CRA with respect to any particular factual situation. In addition, we have not considered the potential application of other provisions of the Act.
We apologize for the delay in responding to your request.
Maurice Bisson, CGA
for the Director
Corporate Reorganizations and Resource Industries Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.