| 19(1) | File No. 5-8275 |
| S.J. Tevlin | |
| (613) 957-2118 |
June 30, 1989
Dear Sir:
Re: General Anti-Avoidance Rule
This is in response to your letter of June 23, 1989 wherein you requested our comments regarding the application of subsection 245(2) of the Income Tax Act (the "Act") in the following hypothetical situation.
In order to take advantage of a lower income inclusion rate currently available on the disposition of eligible capital property pursuant to subsection 14(1) of the Act, a taxpayer corporation ("Sellco") incorporates a new company ("Newco") and transfers pursuant to subsection 85(1) of the Act all its property necessary for Newco to carry on the business of Sellco. The transfer will take place in a taxation year that commenced prior to June 30, 1988. The property to be transferred includes eligible capital property used in the existing business. It is intended that Newco will eventually sell the business to an arms length purchaser subsequent to June 1989, and if so, Sellco and Newco will elect an amount equal to the fair market value of the eligible capital property. If the sale does not proceed, they will elect at the least of the amounts described in paragraph 85(1)(d) of the Act.
Your concern is whether subsection 245(2) of the Act would apply to the transactions as described above since the purpose of the transfer is to obtain a tax benefit.
In our view such a transaction would be an avoidance transaction within the meaning of subsection 245(3) of the Act. However, generally we are of the opinion that the use of subsections 85(1) and 14(1) of the Act as described in your example would not constitute a misuse or abuse of the provisions of the Act in and by themselves for purposes of subsection 245(4) of the Act. However, other factors pertaining to a particular situation may alter this view.
As explained in paragraph 24 of Information Circular 70-6R, any written or verbal opinions are not rulings and are not binding upon Revenue Canada, Taxation in respect of any taxpayers.
Yours truly,
for Director Reorganizations and Non-Resident DivisionSpecialty Rulings Directorate Legislative and IntergovernmentalAffairs Branch