24 April 2003 External T.I. 2003-0008845 - Excluded property, characterization

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: whether excluded property retains its character as such when the ownership thereof is held for only an instant by a foreign affiliate during a reorganization

Position: yes

Reasons: active business carried on continuously even though the assets are held only momentarily, follows reasoning in Hickman

XXXXXXXXXX 								D. Yuen
	2003-000884
April 24, 2003

Dear XXXXXXXXXX:

Re: Disposition of Assets by Foreign Affiliate

We are writing in response to your facsimile dated March 18, 2003, wherein you requested our comments on a disposition of assets subsequent to a foreign merger. Unless otherwise stated, all references to a statute herein are to the Income Tax Act (Canada), R.S.C. 1985 (5th supp.) c. 1, as amended.

Situation

1. Canco, a Canadian incorporated and resident company, owns 100% of the shares of USco, a company incorporated and resident in the United States. USco carries on significant active business operations.

2. For commercial reasons, U.S. management intends to separate its head office functions from its purchasing, manufacturing and sales activities. To accomplish the reorganization, Canco forms a new wholly-owned corporation incorporated and resident in the United States ("US2"). USco and US2 merge, with US2 as the surviving corporation (the merged entity referred to herein as "New USco"). The merger qualifies as a "foreign merger" as defined in subsection 87(8.1).

3. New USco immediately transfers substantially all of its operating assets to its new wholly-owned subsidiary incorporated and resident in the United States ("New US Opco"), in consideration for shares issued by New US Opco. The assets transferred include inventory, receivables, manufacturing facilities and other assets, all of which were used and held in the active business operations carried on by USco (and all of which will continue to be used and held in the active business operations now to be carried on by New US Opco). All of the assets transferred from New USco to New US Opco were "excluded property" of USco as defined in subsection 95(1).

4. For business reasons, it will not be possible for New USco to operate the business for a short period of time; rather, the commercial requirement is that the assets be transferred from New USco to New US Opco immediately following the merger described in paragraph 2 above.

Your Question

You have asked our view whether the assets transferred by New USco to New US Opco would be excluded property of New USco.

Our Comment

In the scenario you describe, the active business operations continue without interruption from the time they are initially carried on by USco, immediately before its merger with US2, until the time they are ultimately carried on by New US Opco. In such case, it is our view that property which is used or held for the purpose of gaining or producing income from that active business by USco immediately before the merger and which is ultimately used or held for the purpose of gaining or producing income from that active business by New US Opco, would be used or held for that same purpose at the time ownership of the property rested with New USco. Accordingly, it is our view that the property disposed of by New USco to New US Opco in the transaction described in paragraph 3 above would qualify as "excluded property" as defined in subsection 95(1) of New USco.

We hope that the above comment is of assistance to you.

The comment is provided in accordance with the guidelines set out in paragraph 22 of Information Circular IC 70-6R5 dated May 17, 2002, issued by the Canada Customs and Revenue Agency (the CCRA) and is not considered binding on the CCRA.

Yours truly,

Olli Laurikainen
Section Manager
for Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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