Principal Issues: In a given fact situation, what is the fair market value of depreciable properties of two prescribed classes for the purpose of the application of subsection 111(5.1)?
Position: General comments.
Reasons: Question of fact.
2004-010142
XXXXXXXXXX Guy Goulet, CA, M. Fisc.
(613) 957-9768
February 7, 2005
Dear Sir,
Subject: Subsections 111(4) to 111(5.2) of the Income Tax Act
This is in response to your letter of November 1, 2004 requesting our comments on the application of certain rules following an acquisition of control of a corporation in the Particular Situation described below.
Unless otherwise indicated, all statutory references herein are to provisions of the Income Tax Act (the "Act").
Particular Situation
The Particular Situation as you have presented it to us is as follows:
1. Aco, Bco and Cco are taxable Canadian corporations within the meaning of subsection 89(1).
2. Bco is the wholly-owned subsidiary of Cco and is controlled by Cco. Bco and Cco are related persons within the meaning of subsection 251(2) and deal with each other at arm's length within the meaning of subsection 251(1).
3. Aco and Cco are not related persons within the meaning of subsection 251(2) and deal with each other at arm's length within the meaning of subsection 251(1).
4. Aco and Bco are not related persons within the meaning of subsection 251(2) and deal with each other at arm's length within the meaning of subsection 251(1).
5. At a particular time, Aco acquired all of the issued shares of the capital stock of Bco for a price of $1000. This acquisition of shares resulted in an acquisition of control of Bco by Aco.
6. At that time, Bco's assets consisted solely of the following:
|
Fair market value (FMV) |
Capital cost |
Undepreciated capital cost (UCC) |
|
|
Production Equipment (Class 43) |
$1000 |
$2500 |
$700 |
|
Furniture and other equipment (Class 8) |
$500 |
$1000 |
$400 |
|
$1500 |
$3500 |
$1100 |
The FMV of Bco's assets was determined by an independent professional valuator.
7. At that time, Bco had no liabilities on its balance sheet and no contingent liabilities.
Your Questions
You wish us to answer the following questions:
1. For the purposes of subsection 111(5.1), what would the FMV amount be that should be used for the purpose of determining the amount, if any, by which the UCC for Bco of the depreciable property of a prescribed class immediately before the time of Aco's acquisition of control of Bco exceeds the FMV of all of the property of that class immediately before that time? Should the amounts determined for each of the properties by the independent professional valuator (total amount of $1500) or the FMV of $1000 that represents the price paid by Aco for the shares of capital stock of Bco be used?
2. How should Bco allocate the FMV to the different classes of property if the amount to be used is based on the acquisition cost of the shares of the capital stock of Bco, i.e. $1,000?
Our Comments
It appears to us that the situation described in your letter may be an actual situation 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 be fully applicable in a particular situation.
Subsection 111(5.1) provides that, where, at any time, control of a corporation has been acquired by a person or group of persons, the corporation shall deduct, in computing its income for the taxation year ending immediately before that time, the excess, if any, of the UCC for the corporation of depreciable property of a prescribed class immediately before that time, over the total of the FMV of all property of that class immediately before that time and the capital cost allowance or terminal loss allowed in respect of that class for the taxation year that ended, in accordance with subsection 249(4), immediately before that time.
In the Particular Situation, the FMV of Bco's shares were $1,000 at the particular time. This value would be a function of the FMV of the net assets of Bco. Since Bco would have no liabilities at that time, it appears to us that the total FMV of Bco's assets would also be $1,000 immediately before the particular time. The question of what proportion of that amount should be allocated to a prescribed class of depreciable property for the purposes of subsection 111(5.1) is one that must be resolved in accordance with valuation principles and following a full review of all the relevant facts and documents. In this regard, we are of the view that a method of determining the FMV of property of a particular prescribed class based on objective data such as an independent appraisal report, a price list, a sales transaction of similar property, etc., would generally be an acceptable method. It appears to us, therefore, that in this case the amounts established by the independent appraiser could be used as a basis for allocating the $1,000 to the various assets of Bco immediately prior to the time of the acquisition of control.
Finally, please note that our comments do not constitute an advance income tax ruling and, as stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, are not binding on the CRA with respect to any particular situation.
We hope that our comments are of assistance.
Best regards,
Maurice Bisson, CGA
for the Director
Corporate Reorganizations and Resource Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch