2018-0787181R3 Minority owners and Partition of Property

Principal Issues: Partitioning some land with some minority co-owners remaining co-owners in all the parcels after the partition.

Position: Ruling issued.

Reasons: The requirements in subsection 248(21) are met.

Author: XXXXXXXXXX
Section: 248(20),(248(21)

XXXXXXXXXX                                                                                 2018-078718

XXXXXXXXXX, 2019

Dear Sir:

Re:   Advance Income Tax Ruling
         XXXXXXXXXX (collectively the “Taxpayers”)

This is in reply to your letter of XXXXXXXXXX, in which you requested an Advance Income Tax Ruling on behalf of the above-named Taxpayers.  We also acknowledge the receipt of additional information provided during our telephone conversations (XXXXXXXXXX) and other correspondence submitted subsequent to your letter of XXXXXXXXXX.  Any information you submitted in respect of your request is part of this letter only to the extent described herein.

We understand that to the best of your knowledge and that of the Taxpayers involved, none of the issues contained in this ruling request herein are:

(i)   dealt with in an earlier return of the Taxpayers or a related person;

(ii)  being considered by a tax services office or taxation centre of the Canada Revenue Agency (“CRA”) in connection with a previously filed tax return of the Taxpayers or a related person;

(iii) under objection or appeal by the Taxpayers or a related person;

(iv)  the subject of a ruling previously issued by the Income Tax Rulings Directorate to the Taxpayers or a related person; nor

(v)   before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired.

Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C 1985 (5th Supp.), c.1, as amended (the “Act”) and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.

DEFINITIONS

(a) XXXXXXXXXX;

(b) XXXXXXXXXX;

(c) XXXXXXXXXX;

(d) XXXXXXXXXX;

(e) XXXXXXXXXX;

(f) “FMV” means fair market value;

(g) “XXXXXXXXXX” means an unincorporated joint venture formed between XXXXXXXXXX.

(h) XXXXXXXXXX;

(i) “Joint Venture” means the unincorporated joint venture between the Owners in respect of the Property;

(j) XXXXXXXXXX;

(k) “Minority Co-owners” means, collectively, XXXXXXXXXX;

(l) “Owners” means, collectively, XXXXXXXXXX;

(m) “Property” means the property of the Joint Venture consisting of XXXXXXXXXX of vacant land in the XXXXXXXXXX, as described in paragraph 1 of the Facts;

(n) “Property 1” has the meaning set out in paragraph 10 of the Facts;

(o) “Property 2” has the meaning set out in paragraph 10 of the Facts;

(p) XXXXXXXXXX;

(q) XXXXXXXXXX; and

(r) XXXXXXXXXX.

FACTS

1.    The Property that is the subject of this advance income tax ruling request consists of XXXXXXXXXX located at the XXXXXXXXXX.

2.    Each Taxpayer is a Canadian-controlled private corporation that XXXXXXXXXX.

3.    Each Taxpayer is a participant in the Joint Venture, which was formed to develop land in the XXXXXXXXXX.

4.    XXXXXXXXXX holds legal title to the Property as nominee on behalf of the Owners.

5.    Each of the Owners holds an undivided beneficial interest in the Property through the Joint Venture. The percentage beneficial ownership in the Property is divided as follows:

XXXXXXXXXX

6.    XXXXXXXXXX, and the remaining Owners all deal with each other at arm’s length.

7.    The blocks of land making up the Property are the final large development land parcels remaining of an original approximately XXXXXXXXXX land parcel stretching from XXXXXXXXXX.

PROPOSED TRANSACTIONS

8.    The Property is divisible into XXXXXXXXXX parcels; parcels XXXXXXXXXX.

9.    The Joint Venture has obtained approvals from the XXXXXXXXXX for XXXXXXXXXX on each of parcels XXXXXXXXXX.

10.   The parties to the Joint Venture have determined that it would be preferable to divide the Property into XXXXXXXXXX parcels with XXXXXXXXXX and XXXXXXXXXX each taking a leadership position in respect of XXXXXXXXXX land parcels. The parcels are intended to be divided as follows:

(a) Parcels XXXXXXXXXX (“Property 1”); and

(b) Parcels XXXXXXXXXX (“Property 2”).

11.   All ancillary rights and obligations associated with the Property will be divided equally between Property 1 and Property 2 as part of the partition.

12.   Following the division of the Property, XXXXXXXXXX will retain an interest only in Property 1 and XXXXXXXXXX will retain an interest only in Property 2.

13.   The Minority Co-owners will maintain an interest in all XXXXXXXXXX land parcels equal to their pre-existing interest in all of the Property.

14.   Property 1 has a FMV equal to the FMV of Property 2.

15.   The Owners propose to complete the following transactions:

Step 1      The Property will be partitioned resulting in a change to the beneficial ownership of the Property such that:

i.    Property 1 will be co-owned by XXXXXXXXXX (owning a XXXXXXXXXX% interest) and the Minority Co-owners (owning, in aggregate, a XXXXXXXXXX% interest); and

ii.   Property 2 will be co-owned by XXXXXXXXXX (owning a XXXXXXXXXX% interest) and the Minority Co-owners (owning in aggregate, a XXXXXXXXXX% interest)

The FMV, immediately after the partition, of each of the new interests acquired by each of the Owners will be equal to the FMV, immediately before the partition, of each of the Owners' previous undivided interests in the Property. There will be no cash payments among the Owners and no debt assumption or other FMV equalization mechanisms.

Step 2      The nominee agreement between the Owners and XXXXXXXXXX will be modified to reflect the change in beneficial ownership described in Step 1

PURPOSES OF THE PROPOSED TRANSACTIONS

16.   The purpose of the proposed transactions is to permit the XXXXXXXXXX principal developers, (XXXXXXXXXX), to pursue development activity in respect of the Property separately, with each of XXXXXXXXXX taking a leadership position on XXXXXXXXXX separate XXXXXXXXXX land parcels. The Minority Co-owners wish to maintain their respective interests in all XXXXXXXXXX land parcels and continue as participants with XXXXXXXXXX.

RULING GIVEN

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, we rule as follows:

A.    Subsection 248(21) will apply to the partition of the Property as described in Paragraph 15.

The above ruling is given subject to the limitations and qualifications set out in Information Circular 70-6R9 dated April 23, 2019 and is binding on the CRA provided that the proposed transactions are completed by XXXXXXXXXX.

COMMENTS

(a)   This letter is based solely on the facts and proposed transactions described above.  Further, nothing in this letter should be construed as implying that the CRA has confirmed, agreed to, reviewed or made any determination in respect of: the FMV or adjusted cost base of any property referred to herein;

(b)   any tax consequences relating to the facts and proposed transactions or any transaction or event taking place either prior or subsequent to the implementation of the proposed transactions, whether described in this letter or not, other than those specifically described in the ruling given above.

Furthermore this Ruling will only apply subject to parcels XXXXXXXXXX collectively having a FMV equal to the collective FMV of Parcels XXXXXXXXXX.

Yours truly,

XXXXXXXXXX
for Director
Business Income and Capital Transactions Section
Business and Employment Division
Income Tax Rulings Directorate

All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without the prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5.

© Her Majesty the Queen in Right of Canada, 2020

Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistribuer de l'information, sous quelque forme ou par quelque moyen que ce soit, de façon électronique, mécanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.

© Sa Majesté la Reine du Chef du Canada, 2020