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: Assumption of debt on section 85 transfer
Position: Paragraph 85(1)(b) can apply
Reasons: Debt assumed as consideration for property transferred
Tax Executives Institute, Inc.
Liaison Meeting
December 6, 2000
Question 22 - Subsection 85(1) Rollover
At the 2000 Canadian Tax Foundation Conference, a CCRA representative outlined three examples where the CCRA would apply paragraph 85(1)(b) to otherwise tax-free transactions. Each example includes a step that requires the redemption of shares received on the transfer of the assets to the Transferee under subsection 85(1) of the Act. One of the examples used is as follows:
The asset to be transferred has a fair market value of $1000 and ACB of $200. The Transferor transfers the asset and issues a note payable in the amount of $500 to the Transferee. As consideration, the Transferor receives shares of the Transferee having a fair market value of $800 and transfers liabilities to the Transferee in the amount of $700. The Transferee redeems $500 worth of shares and as consideration surrenders its receivable from Transferor of $500 for cancellation.
Subsection 55(3) provides that, if various criteria are satisfied, assets can be transferred between companies in a corporate group without a requirement that shares received on the transfer from the Transferee be retained by the Transferor. In effect, the subsection permits the use of transitory shares in certain transactions.
Assume the following facts:
An asset to be transferred has a fair market value of $1000 and ACB of $200. The Transferor transfers the asset to the Transferee and receives, as consideration, shares of the Transferee having a fair market value of $800 because the Transferor also transfers liabilities in the amount of $200. The Transferee then redeems $800 worth of shares and, as consideration, issues to the Transferor an interest-bearing demand note having a principal amount of $800. The demand note remains outstanding and is repaid by the Transferee as funds become available.
TEI would appreciate the CCRA's confirming that transitory shares redeemed in the course of an 85(1) transaction to which subsection 55(3) applies are not considered offside and, thus the CCRA will not apply paragraph 85(1)(b) to the transaction.
Would the CCRA's response to the hypothetical transaction differ if the demand note were transferred to the Transferor's parent company as a dividend in kind or if the demand note were transferred to the Transferor's parent company in repayment of a debt outstanding prior to the date of the asset transfer?
CCRA Response
We confirm that the demand note received by the Transferor on the redemption of shares described in the hypothetical situation set out in the question would not be considered to be non-share consideration received for the transferred assets for the purposes of paragraph 85(1)(b).
We have not had an opportunity to consider a situation such as the one referred to in the follow-up question, where the demand note is assigned by the Transferor to its parent. Where the demand note is assigned to the parent in satisfaction of a debt owing to the parent, it is arguable that there has been an effective assumption of that debt by the Transferee such that paragraph 85(1)(b) might apply. However, we would have to consider the circumstances of an actual situation before taking such a position.
Prepared by Mark Symes
File 2000-005648
December 2000
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