10 January 1992 CGA Roundtable, Q. 19, 7-912224

Where, in order to accommodate the sale by the other shareholder (Mr. A) of his shares of the corporation, Mr. B agrees that following the purchase the corporation will spin-off assets that are not wanted by the purchaser in a butterfly reorganization, s. 110.6(7) will apply to deny the capital gains exemption to Mr. A.

Where Mr. A and Mr. B, who each own 50% of the shares of A Ltd. and B Ltd., enter into a shareholders' agreement with respect to their shareholdings in both corporations which include clauses that fall under s. 251(5)(b) (for example, the obligation to buy and sell if one withdraws from the business), the two corporations will be related for purposes of the exemption in s. 55(3)(a), unless s. 55(4) applies.

Where shares are issued by a corporation on the conversion of debt owed by the corporation to a non-arm's length shareholder, the value of the debt rather than its principal amount must be considered as the amount paid to acquire the shares when determining whether the cost of the shares is limited by s. 69(1)(a).

A corporation converts a debt owed to one of its shareholders, with whom it does not deal at arm’s length, to shares when the corporation is in a deficit position. The adjusted cost base of the shares received is reduced to their fair market value. Would this transaction be a contribution of capital that would increase the adjusted cost base of the shares issued pursuant to s. 53(1)? The Department responded:

The Department would consider that proportion of such part of the amount of the contribution as cannot reasonably be regarded as a benefit conferred by the shareholder on a related person (other than the corporation) to be a contribution of capital that would increase the adjusted cost base of the shares of a corporation pursuant to paragraph 53(1)(c) of the Act only if there was a real increase in the value of the shares of the corporation as a result of the conversion. Moreover… the value of the debt converted (rather than the principal amount) must be considered the amount paid to acquire the shares in determining whether the amount so paid exceeds the fair market value of the shares acquired for the purposes of paragraph 69(1)(a)… ..