| 24(1) | File No. 5-9595 (900027) |
| J.D. Brooks | |
| (613) 957-2097 | |
| 19(1) |
June 8, 1990
Dear Sirs:
Re: Subsection 1103(2d) of the Income Tax Regulations
We are writing you in reply to your letter of February 1, 1990 in which you requested our interpretation of subsection 1103(2d) of the Regulations to the hypothetical situation described below.
Confirmation of the tax consequences of transactions is only provided in response to a request for an advance income tax ruling, as described in our Information Circular 70-6A dated December 18, 1978. Although we are unable to provide any binding confirmation in response to your request, we have stated below some general comments.
Your hypothetical situation is rephrased as follows:
1. Corporation X is a wholly-owned subsidiary of Corporation A. Both corporations have fiscal year-ends of December 31.
2. In 1988, Corporation A transfers class 29 assets (the "subject properties") to Corporation X electing pursuant to the provisions of subsection 85(1) of the Income Tax Act to transfer each of the assets at an agreed amount such that the aggregate of the agreed amounts is equal to the undepreciated capital cost of the property in the class. Subsection 1102(14) of the Regulations operates to deem the subject properties to be in class 29 for Corporation X.
3. In 1988 and 1989, Corporation A acquires class 39 assets ("new property") from Corporation Z, a corporation which deals at arm's length with Corporation A.
4. Due to a change in circumstances, it is decided to wind up Corporation X into Corporation A in 1989 in accordance with subsection 88(1) of the Act. On the winding-up, the subject properties are transferred back to Corporation A. Subsection 1102(14) of the Regulations again operates to deem the subject properties to be in class 29 for Corporation A.
5. Later in 1989, Corporation A sells the subject properties to an arm's-length party for aggregate proceeds of disposition in excess of the undepreciated capital cost of property in class 29.
You queried whether Corporation A can elect for its 1989 year pursuant to subsection 1103(2d) of the Income Tax Regulations to transfer the subject properties to class 39 prior to their disposition to the arm's-length party. You also queried whether Corporation A can, alternatively, elect for its 1988 year pursuant to subsection 1103(2d) so that the subject properties will subsequently be class 39 property obtained by Corporation A on the winding-up of Corporation X.
Our Comments
A taxpayer will not be eligible to elect under subsection 1103(2d) of the Regulations if the property in the former class is not property that would have been included in the present class if it had been acquired by the taxpayer at the time the new property was acquired, or the property in the present class is not property that would have been a property included in the former class if it had been acquired by the taxpayer at the time the former property was acquired. This election is intended to apply where a specific type of property is described in two classes and it is clearly indicated that property of that description would fall within one class if acquired before a particular date and in the other class if acquired on or after that particular date. For example, where the property is a water storage tank and it is property which is acquired to be used by the taxpayer in Canada primarily in the manufacturing of goods for sale, it belongs in class 29 if it is acquired before 1988 and it belongs in class 39 if it is acquired after 1987 (subject to a two-year grandfathering rule, which determines whether it belongs in class 29 or 39).
In your example, Corporation A is selling class 29 assets in 1989; and Corporation A has class 39 assets, being the new property. Since its class 29 assets would be in class 39 if they were acquired in 1988 and 1989 from Corporation Z, the condition described in paragraph 1103(2d)(c) of the Regulations would be satisfied. However, the condition described in paragraph 1103(2d)(d) would not be satisfied since, if Corporation A had acquired its new property in 1989 from Corporation X, the new property would not be in class 29. Therefore, Corporation A cannot elect under subsection 1103(2d) of the Regulations with respect to its disposition of the subject properties in 1989.
With regard to your second question, Corporation A could elect, with respect to the transfer of the subject properties from Corporation A to Corporation X in 1988, to transfer the subject properties from class 29 to class 39 provided that the election is made in the manner described in subsection 1103(2d) and within the time period referred to in subsection 1103(3) of the Regulations. Such an election could be made by Corporation A only on or before the later of June 30, 1989, being 6 months after Corporation A's 1988 fiscal year-end, and July 2, 1990, being the date established by the coming-into-force provision. A valid election would result in the class 29 assets being transferred at the start of 1988 to class 39 pursuant to the provisions of subsection 13(5) of the Act. Regulation 1102(14) would then apply with respect to the transfer to Corporation X and the subsequent transfer back to Corporation A, with the result that Corporation A would re-acquire class 39 assets on the winding-up of Corporation X.
Our comments in this letter represent our general views with respect to the subject matter of your letter. The facts of a particular situation may lead to a different conclusion. Our comments in this letter are not rulings and, in accordance with the guidelines set out in Information Circular 70-6A dated December 18, 1978, are not binding on the Department.
Yours truly,
for DirectorBusiness and General DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch