Dear Sirs:
Re: Paragraph 88(1)(d) of the Income Tax Act (the "Act")
This is in reply to your letter dated October 12, 1990, whereby you requested a technical interpretation with respect to the application of paragraph 88(1)(d) of the Act to the following hypothetical situation.
Corporation S has owned a piece of real estate for numerous years as capital property. The shareholders of corporation S have agreed to sell all of their shares in the capital of the corporation to a purchaser, called corporation P. The shareholders of corporation P have a long history of buying and selling real estate and generally treat gains on the disposition of real estate as being on account of income rather than as capital gains. It is the intention of corporation P to wind up corporation S pursuant to subsection 88(1) of the Act and thereafter to sell all or a portion of the property.
You requested that we confirm the following:
1. the fact that corporation P may be characterized as a trader in real estate would not deny the increase, as provided in paragraph 88(1)(d) of the Act, in the cost of the real property acquired by corporation P upon the winding-up of corporation S;
2. the provisions of paragraph 88(1)(d) of the Act will apply notwithstanding the fact that corporation P does not have a fiscal year-end between the time of the acquisition of the shares of corporation S and the disposition by corporation P of the underlying property.
OUR COMMENTS
Paragraph 88(1)(d) of the Act applies to capital property (subject to certain exceptions) owned by a subsidiary at the time that the parent last acquired control of the subsidiary and thereafter without interruption until such time as it was distributed to the parent on the winding-up.
We are consequently of the opinion that the property transferred to the parent must have been capital property of the subsidiary at the time control was last acquired by the parent. As mentioned in subparagraph 23(b) of IT-488R "Winding-up of 90%-Owned Taxable Canadian Corporations":
Whether or not a property can be characterized as a capital property depends upon a consideration of the facts surrounding the acquisition of the property and the holding of the property by the subsidiary rather than by the parent.
In order for paragraph 88(1)(d) to have application, corporation S would have to have held the real estate as capital property at the time corporation P acquired control of corporation S. Whether or not the property was capital property at that time is a question of fact.
The provisions of paragraph 88(1)(d) of the Act could apply to the determination of the cost, to corporation P, of the real property of corporation S, notwithstanding the fact that corporation P does not have a fiscal year-end between the time of the acquisition of the shares of corporation S and the disposition by corporation P of the underlying property. The foregoing response is an opinion provided in accordance with the practice described in paragraph 21 of Information Circular 70-6R2, dated September 28, 1990, and is not binding on theDepartment.
Yours truly,
for DirectorReorganizations and Non-Resident DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch