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:
Whether subsection 15(1) would apply to the shareholder in a wholly-owned corporation situation.
Position:
No.
Reasons:
Benefit issues can only be addressed on a case by case basis. This scenario did not seem offensive.
964068
XXXXXXXXXX Jim Wilson
Attention: XXXXXXXXXX
March 16, 1998
Dear Sirs:
Re: Subsection 15(1) of the Income Tax Act ("Act")
We are writing in response to your letter of December 9, 1996 wherein you requested our comments concerning the application of subsection 15(1) of the Act with respect to a transaction involving a subsection 85(1) rollover to a wholly-owned corporation. We apologize for the delay in our response.
Our understanding of the facts is as follows:
Facts
1.Foreignco is a non-resident corporation.
2.Foreignco owns the following shares of a Canadian corporation ("Canco"):
i)1,000 Class A Preferred Shares having an aggregate paid-up capital ("PUC") and adjusted cost base ("ACB") of $100,000 and an aggregate fair market value ("FMV") of $100,000.01.
ii)30 common shares having an aggregate PUC and ACB of $30,000 and an aggregate FMV of $90,000.01.
3.Holdco is a corporation resident in Canada. The issued share capital of Holdco, which is entirely held by Foreignco, consists of 10 common shares without par value having an aggregate ACB and PUC of $1,000 and 500 Class A Preferred Shares that are non-voting redeemable, retractable having an aggregate ACB and PUC of $500,000.
4.Foreignco wishes to sell its Canco shares to Holdco pursuant to subsection 85(1) of the Act. Prior to the sale, Holdco will increase its authorized capital by creating 10,000 First Preferred Shares with a par value of $1,000 per share redeemable for $1,000 per share and 10,000 Second Preferred Shares with a par value of $1,000 per share redeemable for $3,000 per share. The First Preferred Shares and Second Preferred Shares will be redeemable at the option of Holdco but not retractable. On a liquidation or wind-up, the holders of the First Preferred Shares will, before any amounts are paid to the holders of the existing preferred shares or the common shareholders, be jointly and equally entitled with the holders of the second Preferred Shares to receive the redemption amount of their shares.
5.Foreignco will sell its Class A Preferred Shares in Canco to Holdco and receive from Holdco as payment therefor 100 First Preferred Shares plus a single common share with an assigned capital of $.01. Foreignco will sell its 30 common shares of Canco to Holdco and receive from Holdco as payment therefor 30 Second Preferred Shares plus a single common share with an assigned capital of $.01.
6.In each case, an election will be made pursuant to subsection 85(1) of the Act for proceeds of disposition to Foreignco equal to the ACB of the Canco shares sold. At the time of the sale, Holdco will be in a deficit position.
7.Holdco does not want to make the First and Second Preferred Shares retractable since doing so will compel Holdco's auditors to show the retraction amount as a liability.
Our Comments
The situation described in your letter involves an actual proposed transaction. Assurance as to the tax consequences of actual proposed transactions will only be given in the context of an advance income tax ruling. The procedures for requesting an advance income tax ruling are outlined in Information Circular 70-6R3 dated December 30, 1996 issued by Revenue Canada, Customs, Excise and Taxation. However, we can offer the following general comments which we hope will be of assistance to you.
Under the fact situation described above subsection 15(1) of the Act would not generally be applied as a result of any increase in value to the 500 Class A Preferred Shares or the 10 common shares of Holdco held by Foreignco resulting from the transactions described above. However, cases involving the potential application of subsection 15(1) must be reviewed on a case by case basis. Accordingly, without the opportunity to undertake an analysis of the relevant facts of a particular case, the Department cannot rule out the possible application of subsection 15(1), notwithstanding that paragraph 85(1)(e.2), subsection 51(2) or subsection 86(2)(F1) do not apply because of the "wholly-owned corporation" exception.
We trust you will find the above comments of some assistance.
Yours truly,
for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
endnotes
1 See the Department's position regarding the "wholly-owned corporation" exception with respect to sections 51 and 86 discussed in Question #13 of the Revenue Canada Forum at the 1996 Corporate Management Tax Conference.
