Principal Issues: In a given situation where Opco is wholly-owned by Holdco, Holdco and Opco amalgamate, Opco's only property is a timber limit other than a timber resource property, whether Amalco can bump the cost of the land on which is the timber pursuant to 87(11)(b) and 88(1)(c) and (d)?
Position: No.
Reasons: Land that is part of a timber limit other than a timber resource property is an ineligible property pursuant to 88(1)(c) as the land is depreciable property pursuant to paragraph 1100(1)(e) and Schedule VI of the Income Tax Regulations and depreciable property is ineligible property pursuant to 88(1)(c)(iii).
XXXXXXXXXX 2005-011042
Marc LeBlond
April 20, 2005
Dear Sir,
Subject: Subsection 87(11) and paragraphs 88(1)(c) and 88(1)(d) of the Income Tax Act
This is in response to your fax of January 7, 2005 requesting our comments on the application of the above provisions of the Income Tax Act relating to the increase in the cost of certain property on the amalgamation of a parent corporation and its subsidiary, in the situation described below.
Unless otherwise indicated, all statutory references herein are to provisions of the Income Tax Act (the "Act").
The Situation
- Mr. X held all of the outstanding shares of the capital stock of Holdco. The total adjusted cost base of the Holdco shares to Mr. X was $XXXXXXXXXX. The total paid-up capital of the Holdco shares was $XXXXXXXXXX. Holdco was a "taxable Canadian corporation" as defined in subsection 89(1).
- Holdco held all of the outstanding shares of the capital stock of Opco. The total adjusted cost base of the Opco shares to Holdco was $XXXXXXXXXX. The total paid-up capital of the Opco shares was $XXXXXXXXXX. Opco was a "taxable Canadian corporation" as defined in subsection 89(1).
- Holdco was a holding company whose only investment was in shares of Opco. Opco was a commercial woodlot owner and operator.
- Holdco and Opco amalgamated in order to match Holdco's interest expense with Opco's woodlot revenues.
- Immediately prior to the amalgamation, Opco owned only woodlots. The total "cost amount", as defined in subsection 248(1), of the woodlots held by Opco was $XXXXXXXXXX. The total market value of the woodlots (based on an engineer's report) was $XXXXXXXXXX (i.e. $XXXXXXXXXX for the land and $XXXXXXXXXX for the woodlots). The land and woodlots were "capital property" as defined in section 54.
Your Question and Comments
You asked whether, in the situation presented, the corporation resulting from the amalgamation of Holdco and Opco could increase the cost of the land acquired on the amalgamation by $XXXXXXXXXX pursuant to paragraphs 87(11)(b), 88(1)(c) and 88(1)(d).
In your analysis, you stated that woodlots could not be bumped because they are "ineligible property" as defined in paragraph 88(1)(c) as they are timber limits that are depreciable property under Schedule VI of the Regulations to the Income Tax Act (the "Regulations").
In your view, the land is property other than "ineligible property" that is eligible for the increase under paragraph 88(1)(d) for the following reasons:
- It was capital property of the subsidiary at the time Holdco acquired the shares
- It was always held by Opco from the time the shares were acquired until the time the land was distributed to Holdco;
- it is not ineligible property (under subsection 13(21), land is not depreciable property since a deduction is not available pursuant to paragraph 20(1)(a)).
You described your calculation of the cost-of-land increase under paragraph 88(1)(d) as follows:
Cost of shares $XXXXXXXXXX
Cost amount of land $XXXXXXXXXX
Amount determined $XXXXXXXXXX
Furthermore, you stated that the amount of the increase cannot exceed the market value of the land immediately before the amalgamation, i.e. $XXXXXXXXXX.
Our Comments
As stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, it is the practice of our Directorate not to issue written opinions on proposed transactions otherwise than by way of advance rulings. Furthermore, when it comes to determining whether a completed transaction has received appropriate tax treatment, that determination is made first by our Tax Services Offices as a result of their review of all facts and documents, which is usually performed as part of an audit engagement. However, we can offer the following general comments which may not apply in full to the situation you have submitted to us.
In our view, in the situation you have presented to us, the corporation resulting from the amalgamation of Holdco and Opco would not be able to increase the cost of the land acquired at the time of the merger as it was "ineligible property".
The land was "ineligible property" pursuant to subparagraph 88(1)(c)(iii) because it was "depreciable property" as defined in subsection 13(21). It was "depreciable property" because it was part of a timber limit other than a depreciable "timber resource property" pursuant to paragraph 20(1)(a), paragraph 1100(1)(e) of the Regulations and Schedule VI of the Regulations.
As stated in paragraphs 7 and 4, respectively, of Interpretation Bulletin IT-481 - Timber Resource Property and Timber Limits, " If a taxpayer acquires land on which there is standing timber (for example, freehold timberlands), such property is a timber limit.” and “Unlike land on which is located a property which qualifies for inclusion in one of the classes in Schedule II of the Regulations, land which is acquired as a part of a timber limit is depreciable under Schedule VI of the Regulations and does not exist as a separate property for purposes of the Act.”
Furthermore, regarding the computation of the amount determined in respect of a property under paragraph 88(1)(d), we wish to draw your attention that it is necessary to know the fair market value of a property of the subsidiary at the time the parent last acquired control of the subsidiary, rather than the fair market value of that property immediately before the amalgamation.
We hope that our comments are of assistance.
Best regards,
Maurice Bisson, CGA
Manager
Corporate Reorganizations and Resource Industries Section
Corporate Reorganizations and Resource Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch