Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues: Does certain land owned by the corporation constitute more than one property for purposes of the definition of the phrase "share of the capital stock of a family farm corporation" in subsection 70(10) of the Act?
Position: No.
Reasons: Based upon the facts of the situation. The land has been used by the corporation principally in, and derives its fair market value principally from, the business of farming. In particular, the land does not constitute, and has never constituted, real property the principal value of which depends upon its mineral resource content or its XXXXXXXXXX content. In addition, the land in question is a contiguous block of land contained on one legal title and in respect of which there has never been a reservation of mineral rights by the taxpayer.
XXXXXXXXXX 2000-003655
Attention: XXXXXXXXXX
XXXXXXXXXX, 2001
Dear Sirs:
Re: Advance Income Tax Ruling
XXXXXXXXXX
XXXXXXXXXX
This is in reply to your letter dated XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above persons. We also acknowledge your letters of XXXXXXXXXX, as well as your earlier correspondence and our various telephone conversations concerning this matter.
The above corporation files its income tax returns under account number XXXXXXXXXX while the social insurance number of the above individual is XXXXXXXXXX . Each is serviced by the XXXXXXXXXX Tax Services Office and the XXXXXXXXXX Tax Centre.
To the best of your knowledge and that of the taxpayers involved, none of the issues contained herein:
(i) is in an earlier tax return of the taxpayers or a related person;
(ii) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayers or a related person;
(iii) is under objection by the taxpayers or a related person;
(iv) is before the Courts or, if a judgement has been issued, the time limit for appeal to a higher Court has not expired; or
(v) is the subject of an advance income tax ruling previously issued by the Income Tax Rulings Directorate.
Definitions
Unless otherwise stated, in this letter the following terms and expressions have the meanings specified below:
"A Co." means XXXXXXXXXX.
"Act" means the Income Tax Act R.S.C. 1985 (5th Supp.), c.1 as amended to the date of this letter.
"adjusted cost base" has the meaning assigned that term by section 54 of the Act.
"B Co." means XXXXXXXXXX.
"Canadian-controlled private corporation" has the meaning assigned to that expression by subsection 125(7) of the Act.
"capital property" has the meaning assigned that term by section 54 of the Act.
"children" of Mr. X means the following individuals (with their respective social insurance number): XXXXXXXXXX; this individual is not resident in Canada for purposes of the Act).
"mineral rights" include rights in respect of XXXXXXXXXX.
"mineral resource" has the meaning assigned that term by subsection 248(1) of the Act.
"Mr. X" means XXXXXXXXXX.
"Mr. Y" means the late XXXXXXXXXX.
"private corporation" has the meaning assigned that term by subsection 89(1) of the Act.
"proceeds of disposition" has the meaning assigned to that expression by section 54 of the Act.
"related persons" has the meaning assigned to that expression by subsection 251(2) of the Act.
"share of the capital stock of a family farm corporation" has the meaning assigned to that expression by subsection 70(10) of the Act.
"spouse" of Mr. X means XXXXXXXXXX.
"taxable Canadian corporation" has the meaning assigned to that expression by subsection 89(1) of the Act.
Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:
Facts
1. A Co. is a corporation subsisting under the Business Corporations Act of XXXXXXXXXX which was formed upon an amalgamation in XXXXXXXXXX. One of the three predecessor corporations, B Co., was incorporated pursuant to the laws of the XXXXXXXXXX.
A Co. is a private corporation, a Canadian-controlled private corporation and a taxable Canadian corporation for purposes of the Act. The fiscal period of A Co. ends on XXXXXXXXXX.
2. The authorized share capital of A Co. consists of an unlimited number of common shares. Its issued share capital consists of XXXXXXXXXX common shares, all of which are owned by Mr. X and held by him as capital property. Although the relevant determinations have not been finalized, the fair market value of the shares of A Co. exceeds the adjusted cost base of those shares by a substantial margin.
3. Mr. X, his spouse and XXXXXXXXXX children are, and will be at the time of the transfers of shares described in paragraph 12 below, resident in Canada for purposes of the Act. All of these individuals are over 18 years of age.
4. Since its formation in XXXXXXXXXX as described in paragraph 1 above, A Co. has carried on, and continues to carry on, a XXXXXXXXXX business in the Province of XXXXXXXXXX (the "XXXXXXXXXX Business"). A Co. does not carry on any other business. The assets owned by A Co. and used by it to carry on the XXXXXXXXXX Business are described in more detail in paragraph 10 below, however, they include approximately XXXXXXXXXX contiguous acres of land (XXXXXXXXXX ) and an inventory of XXXXXXXXXX (stated as comprising XXXXXXXXXX in the financial statements for the fiscal period of A Co. which ended on XXXXXXXXXX).
XXXXXXXXXX operations were originally established XXXXXXXXXX in 1894 by the late Mr. Y, XXXXXXXXXX. Mr. X's father acquired all the shares of B Co. in XXXXXXXXXX from the estate of Mr. Y's son (the parties to such transaction not being related persons for purposes of the Act). Mr. X subsequently acquired the shares of A Co., essentially, from his father and from employment options.
Mr. X has been actively engaged on a regular and continuous basis in the XXXXXXXXXX Business for many years. As managing director and president of A Co., Mr. X is responsible for all strategic decision making for the corporation. One of his children, who is also a director of A Co., along with another individual who deals at arm's length with Mr. X and his children, are responsible for the day-to-day management of A Co.
5. XXXXXXXXXX.
6. XXXXXXXXXX.
Except as described above in this paragraph, there has never been a reservation of mineral rights in respect of the land XXXXXXXXXX such that there is only one legal title thereto, i.e., a separation of the surface rights and rights to any underlying minerals has not occurred. In other words, the mineral rights in respect of the land XXXXXXXXXX were not reserved upon the original grant of the land from the Crown and have not been reserved subsequently except to the extent noted above in this paragraph.
7. All of the land XXXXXXXXXX has been, and continues to be, used by A Co. principally in carrying on the XXXXXXXXXX Business, XXXXXXXXXX.
The fair market value of XXXXXXXXXX is derived primarily from its use in the XXXXXXXXXX Business. In particular, XXXXXXXXXX does not constitute, and has never constituted, real property the principal value of which depends on its mineral resource content or its XXXXXXXXXX content.
8. XXXXXXXXXX.
9. XXXXXXXXXX.
A Co.'s financial statements for its fiscal period ended XXXXXXXXXX reflected gross revenues from XXXXXXXXXX operations of $XXXXXXXXXX with "Leases and royalties" contributing $XXXXXXXXXX in other income. All income earned by A Co. is employed in the XXXXXXXXXX Business.
10. The property owned by A Co., as well as its estimated fair market value at XXXXXXXXXX, is as follows:
Cash (net of liabilities) $XXXXXXXXXX
Accounts Receivable XXXXXXXXXX
Marketable Securities XXXXXXXXXX
Inventories XXXXXXXXXX
Other XXXXXXXXXX
Investments XXXXXXXXXX
Capital Assets
(including buildings, equipment and fences) XXXXXXXXXX
Land XXXXXXXXXX
Except for $XXXXXXXXXX of the Investments, all of the above property is used by A Co. principally in carrying on the XXXXXXXXXX Business. A Co. also owns the Separate Mineral Rights which had an estimated fair market value at XXXXXXXXXX of $XXXXXXXXXX.
The current fair market value of each of the properties referred to earlier in this paragraph would not be significantly different from its value as reflected above. If the mineral rights underlying XXXXXXXXXX were to be separated from the surface rights related thereto, it is estimated that the current fair market value of such mineral rights would be $XXXXXXXXXX.
11. A Co. has not sold, or taken steps to separate, the mineral rights from the surface rights in respect of XXXXXXXXXX because it desires to control the mineral rights to effectively manage and preserve the surface rights. It wants to avoid any conflict which could arise if such separation occurred. XXXXXXXXXX.
Proposed Transactions
12. Mr. X will transfer, in all cases by way of gift, one common share in the capital stock of A Co. to his spouse, as well as one such share to each of his XXXXXXXXXX children who are resident in Canada for purposes of the Act. In particular, each of these XXXXXXXXXX share transfers will be a voluntary transfer of property by Mr. X in respect of which no consideration will be received by, or will accrue to, him. For greater certainty, a share in the capital stock of A Co. will not be transferred to the child of Mr. X who is not resident in Canada for purposes of the Act.
13. No election will be made by Mr. X, under subsection 73(1) of the Act in his return of income under Part I of the Act for the taxation year in which the share of A Co. is transferred to his spouse as described in the preceding paragraph, not to have the provisions of that subsection apply to that transfer.
14. Mr. X's will currently stipulates that, upon his death, the shares of A Co. then owned by Mr. X are to be divided into XXXXXXXXXX equal parcels to be transferred to a trust for his spouse and directly to each of his XXXXXXXXXX children. If one of his children remains not resident in Canada for purposes of the Act at the time of Mr. X's death, that child's respective parcel will also be transferred to a trust for his spouse.
15. There is no intention to change the combination of assets held by A Co. in the intervening period between the completion of the proposed transactions described herein and the death of Mr. X, unless necessary to maintain the potential for the shares in the capital stock of A Co. to each qualify as a share of the capital stock of a family farm corporation.
Purpose of the Proposed Transactions
16. Mr. X wishes to provide an opportunity for his children to continue the XXXXXXXXXX operation carried on XXXXXXXXXX in its present form. The purpose of the proposed transactions is to clarify the potential for the shares in the capital stock of A Co. to each qualify as a share of the capital stock of a family farm corporation.
Ruling Given
Provided that:
(i) the above statements of facts, proposed transactions and purpose of the proposed transactions are accurate and constitute complete disclosure thereof,
(ii) the proposed transactions are carried out as set forth herein, and
(iii) at the time of each share transfer described in paragraph 12 above, XXXXXXXXXX remains as described in paragraphs 6 and 7 above,
we confirm that for the purposes of paragraph (a) of the definition of "share of the capital stock of a family farm corporation," XXXXXXXXXX (comprised of land and the previously unreserved mineral rights in respect thereof but excluding the XXXXXXXXXX acres described in paragraph 6 above where the surface rights and mineral rights are contained in separate legal titles) will constitute a single property and a separate property, in and by itself.
The above ruling is given subject to the general limitations and qualifications set forth in Information Circular 70-6R3 issued by Revenue Canada on December 30, 1996, and is binding on the Canada Customs and Revenue Agency provided that the proposed transactions are completed by XXXXXXXXXX.
This ruling is based on the Act in its present form and does not take into account the effect of any proposed amendments thereto.
I. Except as expressly stated, our ruling does not imply acceptance, approval or confirmation of any income tax implications of the facts or proposed transactions. In particular, nothing in this letter should be interpreted as confirming, either expressly or implicitly:
(i) the determination of the fair market value or adjusted cost base of any property referred to herein;
(ii) the determination of what the fair market value of any property referred to herein will be attributable to at a particular time;
(iii) that a particular property of A Co. is used in the XXXXXXXXXX Business; or
(iv) that a common share of A Co. will be a share of the capital stock of a family farm corporation at any particular time.
II. It is our view that the Separate Mineral Rights, as well as the lease referred to in paragraph 9 above, do not constitute property used by A Co. in carrying on the XXXXXXXXXX Business for purposes of the definition of the expression "share of the capital stock of a family farm corporation" contained in subsection 70(10) of the Act.
III. Pursuant to the provisions of subparagraph 69(1)(b)(ii) of the Act, Mr. X will be deemed to have received proceeds of disposition, for the shares of A Co. transferred by way of gift as described in paragraph 12 above, equal to the fair market value of those shares at the time of such transfers, unless expressly otherwise provided in the Act.
Yours truly,
for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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