5-7675
M. Vallee
(613) 957-2093
Dear Sirs:Re: Paragraph 88(l)(d) of the Income Tax Act (the "Act")
This is in reply to your letter, dated March 9, 1989, whereby you requested our opinion in relation to the interpretation of paragraph 88(l)(d) of the Act in the following hypothetical situation.
Corporation B is a real estate developer that owns a parcel of real estate that it intends to develop and sell. Accordingly, the real estate is inventory to Corporation B.
Corporation A, which deals at arm's length with Corporation B, intends to acquire the common shares of Corporation 8, wind-up Corporation B, thereby acquiring ownership of the real estate that Corporation B held, build an apartment block on the real estate and hold the real estate and apartment block as a long-term investment. Corporation A does not have a history of trading in real estate. Accordingly, you are of the opinion that the real estate would be capital property to Corporation A after it acquires the shares of Corporation B.
Corporation A enters into an agreement of purchase and sale with the shareholder(s) of Corporation B under which Corporation A agrees to purchase and the shareholder(s) agree to sell 100, of Corporation B's common shares. Corporation B, as a party to the agreement of purchase and sale, agrees not to dispose of the real estate that it owns between the time that the agreement of purchase and sale is signed and the time that the sale of the common shares closes, which closing is scheduled to take place approximately 90 days after the signing of the agreement.
The price that Corporation A will pay for the common shares of Corporation B is such that the adjusted cost base of the shares of Corporation B to Corporation A, immediately before the winding-up, will exceed the aggregate of the net value for tax purposes of all the subsidiary's property. No dividends of any kind will be paid by the subsidiary to the parent or to a corporation with which the parent does not deal at arm's length on the shares that will be disposed of on the winding-up.
Within a few days after the closing of the sale, Corporation A will adopt a shareholder's resolution authorizing the winding-up of Corporation B and will proceed to complete all the legal steps necessary to complete the winding-up of Corporation B and transfer all of its assets including the real estate to Corporation A.
You requested a technical interpretation as to the application of paragraph 88(1)(d) of the Act in determining the cost of the real estate property to Corporation A upon the winding-up of Corporation B.
Opinion
Paragraph 88(1)(d) of the Act applies to property that was a capital property owned by a subsidiary at the time that the parent last acquired control of the subsidiary and thereafter without interruption until such time as it was distributed to the parent on the winding-up. We are consequently of the opinion that the property transferred to the parent must have been capital property of the subsidiary at the time control was last acquired by the parent. As mentioned in sub-paragraph 23(b) of IT-488 "Winding-up of 901 -Owned Taxable Canadian Corporations":
Whether or not a property can be characterized as a capital property depends upon a consideration of the facts surrounding the acquisition of the property and the holding of the property by the subsidiary rather than by the parent.
Consequently, in order for paragraph 88(1)-(d) to have application, Corporation B would have to have held the real estate as capital property at the time Corporation A acquired control of Corporation B. Whether the real estate property held as inventory by Corporation B would become capital property upon the entering into of the agreement with Corporation A is a question of fact.
This opinion is provided pursuant to the practice referred to in Information Circular 70-6R, dated December 18, 1978.
Yours truly,
for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch