| 19(1) | File No. 5-8987 |
| K. Astaphan | |
| (613) 957-2119 |
Dear Sirs:
Re: Subsection 1101(1) of the Regulations under the Income Tax Act (Canada) (the "Regulations" and "Act") and Subsection 245(2) of the Act
This is in response to your letter of October 25, 1989 wherein you requested that we confirm your opinion in respect of the applicability of the above-captioned provisions to the fact situation described below.
Facts
a) Parentco has two subsidiaries, Sub 1 and Sub 2. You ask that we assume that each subsidiary is carrying on the same business but at different geographical locations.
b) You ask that we assume that Sub I has large balances remaining in its undepreciated capital cost pools while Sub 2's assets are fully depreciated for tax purposes.
c) Parentco decides that it will sell the business assets of Sub 2 to obtain funds for another acquisition. There is currently no purchaser in hand.
d) Parentco amalgamates Sub I and Sub 2-and carries on the business at the different geographical locations in the amalgamated company.
e) A purchaser is eventually found who buys the assets that were formerly in Sub 2 from the amalgamated company.
Opinions requested
You ask that we confirm your opinion that:
1. The assets of the amalgamated company, in respect of both geographic locations, would be in the same capital cost allowance class in Schedule II of the Income Tax Regulations and that Regulation 1101(1) would not prescribe a separate class for each location.
2. The amalgamation of Sub 1 and Sub 2 in contemplation of the sale would not be an avoidance transaction as contemplated in subsection 245(2).
You ask, in addition, assuming that we confirm your opinion, that we comment on whether our opinion would change if the purchaser were in place prior to the amalgamation.
Assumptions
We assume that:
1. Sub 1's depreciable capital properties are of the same prescribed class as those of Sub 2.
2. Parentco will cause
(a) the amalgamated company ("Amalco") to carry on the business at different locations; and
(b) Amalco to dispose of the assets held by Sub 2 prior to the amalgamation.
3. The businesses to be carried on by Amalco at the different geographical locations will not be separate businesses. Please refer to Interpretation Bulletin IT-206R for our views on the question of whether a taxpayer is carrying on one or more businesses.
Our Opinion
1. In our opinion, the classification of Amalco's depreciable capital property on the amalgamation will be determined by the provisions of subsection 1102(14) and depending on the facts, subsection (14.1) of the Regulations, such that the amalgamation, in and of itself, would not result in a reclassification of such property.
2. In our opinion, the transactions described by you could constitute an avoidance transaction, as defined in subsection 245(3) of the Act. Our opinion would be unaffected by the Act that no purchaser is identified at the time of the amalgamation in that fact, in and of itself, would not cause the eventual sale not to be part of the series of transactions that included those described by you. (See subsection 248(10), and see Michael Hiltz "Section 245 of the Income Tax Act", 1988 Conference Report Paper 7, page 7:6, Report of Proceedings of the Fortieth Tax Conference).
Although you have not asked our opinion in respect of the application of subsection 245(4) of the Act, we are of the view that while the transactions would be "avoidance transactions", they would not result directly or indirectly in a misuse of the provisions of the Act or an abuse having regards to the provisions of the Act, other than section 245, read as a whole. The absence in the Act of restrictions against transferring property between related corporations and the fact that the specific rules in subsection 69(11) to (13) address situations of transfers between unrelated parties lead us to' this conclusion.
Please note that we have not, in making the above comments, taken into account any draft legislation that might relate to the issues raised by you.
These comments are an expression of opinion and, as explained in Information Circular IC 70-6R, dated December 18, 1978 are not binding on Revenue Canada, Taxation.
Yours truly,
for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch