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:
1. Whether the Holdco shares owned by an individual in each of the three situations will be grandfathered shares for the purpose of the stop-loss rules.
2. Whether an individual's will could be considered as an agreement in writing for the purposes of these rules.
Position:
1. Question of fact.
2. No.
Reasons:
The law.
XXXXXXXXXX 2000-004496
April 10, 2001
Dear XXXXXXXXXX:
Re: Grandfathering Rules: Subsections 112(3) to (3.32)
This is in reply to your letter dated August 27, 2000 concerning the grandfathering provisions relating to the stop-loss rules in subsections 112(3) to 112(3.32) of the Income Tax Act (the "Act"). These coming-into-force provisions (the "CIF") are found in subsections 131(11) and (12) of the 1995-97 technical bill.
In your letter you outline three hypothetical situations for our consideration. Briefly, in the first situation, you indicate that on April 26, 1995 two unrelated individuals each owned 50% of the shares of a corporation ("Opco"), the shares of which were subject to a written redemption agreement that was in place on or before April 26, 1995. However, no life insurance was in place prior to April 26, 1995. Sometime after April 26, 1995 the shares of Opco are transferred by the individuals to their respective holding corporation ("Holdco") pursuant to subsection 85(1) of the Act. You indicate that since the written redemption agreement contemplated the use by each individual of a separate holding corporation no changes were required to be made to the written agreement. You conclude that the Holdco shares each individual receives for their Opco shares would not be grandfathered because the written redemption agreement did not specifically address the redemption of the Holdco shares and the "share exchange rule" in paragraph 131(12) of the CIF does not appear to apply in this situation.
In the second situation, you indicate that the facts are identical to those described above except that on or before April 26, 1995 Opco was a beneficiary under a life insurance policy which insured the lives of the two individual shareholders of Opco and such insurance was in place on April 26, 1995. In this situation you note that as long as the other conditions outlined in paragraph 131(11)(b) of the CIF are met (i.e., it is reasonable to conclude that a main purpose of the insurance was to fund, directly or indirectly, in whole or in part, a redemption, acquisition or cancellation of the Opco shares by Opco) the Opco shares will be grandfathered. Therefore, if the Opco shares are exchanged after April 26, 1995 for Holdco shares as described in situation 1 above, the share exchange rule in paragraph 131(12) of the CIF will apply to grandfather any Holdco shares issued by each individual's Holdco as consideration for that individual's Opco shares.
In the last situation, the facts are similar to those described in the second situation (i.e., the written redemption agreement and the insurance are in place on April 26, 1995) except that the transfer of the Opco shares to each particular Holdco takes place before April 26, 1995. Your concern here is that because the life insurance was originally taken to fund the redemption of the Opco shares it may be very difficult in practice to find evidence of the types referred to in Technical News #12 that supports that a main purpose of the insurance was to fund, directly or indirectly, in whole or in part, a redemption, acquisition or cancellation of the Holdco shares issued by Holdco. You indicate that this is particularly true if no changes were otherwise required to be made to the written redemption agreement or to the life insurance policy.
You would like our views as to whether the Holdco shares acquired by the individuals in each of the situations described above would be grandfathered for the purpose of these stop-loss rules. You also requested that we provide our views as to whether an individual's will could be considered as an agreement in writing for the purposes of these rules.
Your request appears to relate to either a proposed transaction or a completed transaction. Confirmation of the income tax consequences of proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. To make such a request the advance income tax ruling must be submitted in accordance with the guidelines set out in Information Circular 70-6R4 (IC-70-6R4) dated January 29, 2001. However, if the situation relates to a completed transaction a request for the Canada Customs and Revenue Agency's views must be made to your local Tax Services Office. Notwithstanding the above we are prepared to offer the following comments.
The determination as to whether a disposition of a particular share is grandfathered from the application of the stop-loss rules in subsections 112(3) to (3.32) of the Act under either paragraph 131(11)(a) or (b) or subsection 131(12) of the CIF is a question of fact that can only be determined on a case by case basis.
Where a share is disposed of by a shareholder to a third person and such disposition was contemplated in a written agreement made before April 27, 1995 and the third person, while not party to that particular written agreement, was identified therein, it is our view that such a share would be grandfathered with respect to that disposition under paragraph 131(11)(a) of the CIF. However, any subsequent disposition of that share by the third party would not be grandfathered under paragraph 131(11)(a) of the CIF since it would be made by a person who was not a party to a written agreement made before April 27, 1995. Further, any new share received by that shareholder as consideration for a share that was grandfathered under paragraph 131(11)(a) of the CIF would not be grandfathered under the share exchange rule in subsection 131(12) of the CIF since this rule does not apply for the purpose of paragraph 131(11)(a) of the CIF.
It is also our view that a disposition, redemption or cancellation of a share that is made in accordance with the terms of an individual's will, a corporation's by-laws or the terms and conditions of the particular share will not be made pursuant to an agreement in writing for the purpose of paragraph 131(11)(a) of the CIF. This is consistent with the views expressed by the Department of Finance in their response to Question 2.1.2 at the 1996 congrès of the Association de Planification Fiscale et Financière.
Based on the above, we agree with your conclusion that if the shares of Opco are grandfathered under paragraph 131(11)(a) of the CIF the shares of Holdco received by the individuals in exchange for their Opco shares would not be grandfathered from the stop-loss rules. This would be the result whether the shares of Holdco received by the individuals were common shares or preferred shares. With respect to your second situation, if the Opco shares are grandfathered under paragraph 131(11)(b) of the CIF we agree that the shares of Holdco received by the shareholders as consideration for their Opco shares in a transaction where section 85 of the Act applies would continue to be grandfathered.
As for the third situation, the onus is on the taxpayer to provide evidence to support that it is reasonable to conclude that on April 26, 1995 a main purpose of the life insurance was to fund the redemption of the Holdco shares. Where it can be established that the purpose of the insurance at the time it was taken out was to fund, in whole or in part, the redemption of the Opco shares owned by the individuals, this may be sufficient evidence that on April 26, 1995 a main purpose of the insurance was to fund, directly or indirectly, in whole or in part, the redemption of the Holdco shares owned by the individuals on April 26, 1995. However, as noted above, this remains a question of fact and if suitable documentation cannot be provided to establish this main purpose then such shares would not be grandfathered.
Our comments are provided in accordance with the practice described in paragraph 22 of IC-70-6R4.
Yours truly,
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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