5 November 2001 External T.I. 2001-0087565 - paragraph 88(1)(d)

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 Cco can avail itself of the bump under paragraph 88(1)(d) in respect of shares owned by Aco?

Position: Shares are likely eligible for the "bump".

Reasons: Provided that the shares of Bco are capital property and are not "ineligible property" as defined in subparagraphs 88(1)(c)(iii) through (vi).

		2001-008756
XXXXXXXXXX 	Karen Power, C.A.
(613) 957-8953
November 5, 2001

Dear XXXXXXXXXX:

Re: Paragraph 88(1)(d)

We are writing in reply to your letter of August 17, 2001 wherein you request our opinion regarding the application of paragraph 88(1)(d) and subsection 245(2) of the Income Tax Act (the "Act") in a particular situation.

The situation in your letter may be briefly restated as follows:

1. Aco is a Canadian-controlled private corporation, whose shares are widely held by an unrelated group of individuals.

2. Aco owns a portion of the outstanding shares of Bco. The shares of Aco and Bco are qualifying small business corporation shares as defined in the Act.

3. An unrelated third party owns Cco.

4. The shares of Aco represent capital property to the individual shareholders and the shareholders have not otherwise used their capital gains exemption.

5. The shareholders of Aco deal at arm's length with Aco, Bco and Cco.

You request our views on whether the individual shareholders of Aco would be entitled to claim their lifetime capital gains exemption on a sale of their shares to Cco for cash or debt.

Once Aco becomes a wholly owned subsidiary of Cco, Aco will be wound up or amalgamated with Cco. You enquire whether Cco is entitled to a "bump" under paragraph 88(1)(d) of the Act with respect to the shares of Bco and whether a subsequent sale of Bco would reflect an increase to their adjusted cost base. Finally, you enquire as to whether the above series of transactions would be subject to subsection 245(2).

Our Comments

Written confirmation of the tax implications inherent in particular transactions is given by this directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R4, dated January 29, 2001. Where the particular transactions are completed, the enquiry should be addressed to the relevant Tax Services Office. Therefore, we can only provide you with the following general comments.

Section 84.1 of the Act contains rules concerning a non-arm's-length disposition of shares to a corporation. For the section to be applicable, the disposition must be to a corporation (the "purchaser corporation") with which the taxpayer does not deal at arm's length. Where the provisions of subsection 84.1(1) apply, there may be a reduction of the paid-up capital of the shares of the transferee corporation issued as consideration or the transferee corporation may be deemed to have paid a dividend to the transferor taxpayer.

In the situation you describe, section 84.1 of the Act will not apply where the individual shareholders and Cco are dealing at arm's length. Furthermore, to the extent that all of the other criteria in section 110.6 of the Act are met, an arrangement such as the one described above would not, in and of itself, preclude a taxpayer from claiming a deduction under subsection 110.6(2.1) of the Act.

An increase in the cost base of the shares of Bco held by Aco may be available in circumstances where the adjusted cost base of the Cco's shares in Aco exceeds the net tax value of the subsidiary's properties and provided that, inter alia:

• the shares of Bco represent capital property to Aco at the time Cco acquires control and are owned without interruption until such time as they are distributed to Cco on the winding-up or amalgamation; and
• the shares of Bco are not "ineligible property" as defined in subparagraphs 88(1)(c)(iii) through (vi) of the Act.

Finally we note that the determination as to whether a particular series of transactions would be subject to subsection 245(2) can only be made on a case-by-case basis.

We trust that our comments will be of assistance to you. These comments are provided in accordance with the practice outlined in paragraph 22 of Information Circular 70-6R4.

Yours truly,

for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch