To: Publications Division From: Small Business and
R.C. Shultis General Division
Director J.D. Jones
957-2104W.C. Bailey
Subject: Revision of IT-421R
It is our understanding that the above-mentioned bulletin is currently under revision and that the comment "where an employer grants a loan to two employees jointly, the deemed benefit is to be reported on a 50-50 basis" in paragraph 20 is to remain unchanged
21(1)(a)
It is our view that the taxable benefit, if any, to be reported in these circumstances pursuant to section 80.4 of the Income Tax Act must be based upon the particular facts of a given situation. Where an employer grants a loan to two employees jointly, it is our view that the allocation of the taxable benefit to each employee computed pursuant to section 80.4 of the Income Tax Act will depend upon such factors as the use to which the funds loaned were put or the purpose for which the debt was incurred and cannot, in all circumstances be deemed to be allocated on a 50-50 basis.
We understand that the bulletin is ready for printing and, as we do not wish to delay publication of the bulletin for any substantive changes, we recommend that the last sentence in paragraph 20 of IT-421R be revised as follows:
"Where an employer grants a loan to two employees jointly, normally the deemed benefit is to be reported on a 50-50 basis."
21(1)(c)
B.W. Dath Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch
1989 CORPORATE MANAGEMENT TAX CONFERENCE
QUESTION 17
(A) For the purposes of determining the type of property in a butterfly reorganization, does real estate used in an active business qualify as a "Business Property" or does its ultimate use by the transferee dictate the type of property it constitutes?
(B) If the real estate is used partially in an active business but principally in a specified investment business, would the real estate constitute two types of property? If the answer is affirmative, on what basis should the distinction be made?
DEPARTMENT'S POSITION
(A) It is generally the use of the real estate by the particular corporation before the butterfly reorganization that would be taken into account in determining the type of property the real estate constitutes, A change in use, if any, prior to the butterfly reorganization would also be taken into consideration in making such a determination.
(B) Depending on the facts of a particular situation, it is the Department's view that real estate used partially in an active business and partially in a specified investment business would generally constitute two types of property, namely, business property and investment property. Any reasonable allocation of the fair market value of the property baled on use would be acceptable to the Department for the purposes of determining what portion of the fair market value should be allocated to each type of property.
1989 CORPORATE MANAGEMENT TAX CONFERENCE
QUESTION 18
Revenue Canada takes the position that in determining the fair market value of property for the purposes of paragraph 55(3)b) of the Income Tax Act, one must look to the "Net" fair market value of property when such property is subject to a specific charge. Are there any guidelines for determining whether a debt is specific or general? Does the fact that a debt is supported by a mortgage against particular land make it specific to that land, or does one have to trace the original use of the funds?
DEPARTMENT'S POSITION
Paragraph 55(3)(b) or the Act is silent on the treatment of liabilities of a corporation where property is distributed in a butterfly reorganization. Hence, on a literal reading of paragraph 55(3)(b), to satisfy the pro rata distribution of property test, it would be necessary to look to the fair market value of the property without taking into account debt attached to it. Therefore, the Department will rule on butterfly reorganizations carried out on gross asset basis. However, the Department will also accept the net equity method in determining the fair market value of property provided that all conditions set out in Mide Hiltz's paper "Section 55: An Update" published in the report of the 1984 Corporate Management Tax Conference are met, In Robin Read's paper "Section 55: A Review of Current Issues" presented at the Canadian Tax Foundation Conference on November 29, 1988, The Department stated that in a proposed butterfly which is to be undertaken using the net equity method, the amount of debts should be netted against the aggregate value of the type of property to which they relate. In this regard, a debt which is secured by a mortgage on a property may be related to that property. Tracking of the original use of the borrowed funds is generally not necessary. However, note that the borrowing of monies will involve an acquisition of property and if such borrowing is in contemplation of and before the transfer of property, paragraph 55(3)(b) will not apply to the transfer.
1989 CORPORATE MANAGEMENT TAX CONFERENCE
QUESTION 19
A non-resident owns an interest in a partnership whose assets consist primarily of real property, In Revenue Canada's view, would the partnership interest held by the non-resident be "eligible property" as defined in subsection 85(1.1) of the Act?
DEPARTMENT'S POSITION
As indicated in our response to question 50 at the 1986 Revenue Canada Round Table, it is the Department's view that an interest in a partnership is not considered to be an interest in its underlying assets for purposes of Section 85 of the Act. Thus a partnership interest owned by a non-resident will normally be eligible to be transferred under section 85 of the Act, notwithstanding that the assets of the partnership consist primarily of real estate. However, where the formation of the partnership and the transfer of the land held by a non-resident are undertaken to circumvent the prohibition in section 85, subsection 245(2) of the Act would likely apply.