19 March 2002 External T.I. 2001-0063305 - Outstanding Amount

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: Proper computation of the "outstanding amount" under subsection 74.4(3). Is the reduction in the amount of excluded consideration by way of redemption of shares under subparagraph (i) or (ii) of paragraph 74.4(3)(a)?

Position: Under subparagraph 74.4(3)(a)(ii).

Reasons: The law.

XXXXXXXXXX 2001-006330

March 19, 2002

Dear XXXXXXXXXX:

Re: Application of Subsection 74.4(3) of the Income Tax Act (the "Act")

We are writing in response to your facsimile of December 29, 2000, wherein you asked for our views as to how the "outstanding amount", as defined in subsection 74.4(3) of the Act, should be determined.

In your letter, you describe a situation where an individual ("Mr. A") transferred a property with a fair market value ("FMV") of $500 to a corporation ("Aco") in exchange for special shares of Aco with an aggregate FMV and aggregate redemption amount of $500. You indicate that the conditions in subsection 74.4(2) are met and the special shares of Aco are "excluded consideration" as defined in subsection 74.4(1). Consequently, the "outstanding amount" as defined in paragraph 74.4(3)(a) for the purpose of computing Mr. A's deemed interest benefit would be $500 at the time of the transfer.

You indicate that if Aco later redeems a portion of its special shares owned by Mr. A the outstanding amount under paragraph 74.4(3)(a) should be reduced by the amount of cash received by Mr. A from Aco on that redemption. It is your view that, the reduction to the outstanding amount would occur under subparagraph 74.4(3)(a)(i) and not under subparagraph 74.4(3)(a)(ii). This is because the reference to the phrase "at the particular time" in subparagraph (i) appears to be the same time the deemed interest benefit is required to be made for the particular year under subsection 74.4(2) and not the time the actual transfer or loan of property was made to Aco. However, you recognize that if your interpretation is correct the purpose of subparagraph 74.4(3)(a)(ii) is not clear and therefore you have requested our views on this matter.

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. We can, however, provide the following comments.

In our view, the phrase "at the particular time" in subparagraph 74.4(3)(a)(i) refers to the time the initial transfer or loan of property took place that gave rise to the application of subsection 74.4(2). Moreover, the identical phrase in subparagraph 74.4(3)(a)(ii) refers to the time the individual actually receives consideration from the corporation or an arm's length person, other than excluded consideration, that is received in exchange for excluded consideration previously received by the individual for the transferred property (or excluded consideration substituted for such excluded consideration). Therefore, once the outstanding amount is first established under subparagraph 74.4(3)(a)(i) at the time the transfer of property takes place, any reduction to the outstanding amount after that time will only occur under subparagraph 74.4(3)(a)(ii).

In the above situation, and assuming that one half of the special shares issued to Mr. A as consideration for the property transferred to Aco are redeemed for an amount of cash equal to their redemption amount (say $250), the outstanding amount under paragraph 74.4(3)(a) at the time immediately following the redemption would be computed as follows:

(a) the FMV of the property transferred to Aco at time of transfer, being $500

exceeds the total of

(i) the FMV, at the time of transfer, of the consideration (other than excluded consideration at the time of the transfer) received by Mr. A for the property, being $Nil

and

(ii) the FMV, at the time of receipt, of any consideration (other than excluded consideration at the time of receipt) received by Mr. A from Aco in exchange for excluded consideration previously received by Mr. A for the transferred property, being $250.

Therefore, the outstanding amount at the time one half of Aco's special shares owned by Mr. A are redeemed by Aco would be $250 and this reduction occurs under subparagraph 74.4(3)(a)(ii).

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 and
Interpretations Directorate
Policy and Legislation Branch