CASE STUDY #2
Recommended Solution:
(1) Review of the Act:
There would not appear to be any particular avoidance
provisions in the Act to disallow the application of
the replacement property rules under section 44. (2) Identification of a Tax Benefit:
The deferral of the tax consequences on the disposal of
the real estate property would constitute a tax
benefit. There would probably be a capital gain and
recaptured capital cost allowance on the sale of
the real estate property if the replacement property
rules were not utilized. (3) Identification of an Avoidance Transaction:
Since the replacement property rules would not apply to
the disposition of the real estate property by Holdco
and there is no other business purpose for the transfer
of the real estate property from Holdco to Opco then it
would be difficult to conclude that the primary purpose
of the section 85 rollover is other than to obtain the
tax benefit associated with the replacement property
rules. (4) Misuse or Abuse of the Act:
The Act permits a transfer of property to a corporation
on a tax deferred basis and in this particular case
the transfer of property from Holdco to Opco would be
within the object and spirit of the Act. Neither
section 44 nor subsection 248(1) provides any minimum
ownership or use period regarding the former business
property. If subsequent to the transfer, the property
qualifies as "former business property" then the gain
realized on the disposition may be eligible for
deferral under the provisions of subsection 44(1) of
the Act. It is our view that, subject to the
replacement property being utilized in Opco's active
business, the transactions would qualify for exemption
from the application of subsection 245(2) pursuant to
subsection 245(4).Other Comments
The Draft Amendments to the Income Tax Act and Related
Statutes issued by The Honourable Michael H. Wilson,
Minister of Finance, in July 1990 proposes to amend
the provisions of section 44 so that a former business
property used by the taxpayer or a person related to
the taxpayer will be eligible for the rollover. It
will no longer be necessary to transfer the business
assets from one corporation to another in a corporate
group in order to qualify for the replacement property
rules under the provisions of section 44.000159