Denial of cost of property acquired with options (p. 14:7)
[O]ne of the effects of section 143.3 is that the issuer will not have any cost for property it receives as consideration for granting an option to acquire an interest in the issuer.
Avoidance for issuing options for cash (p.14:11)
On the premise that section 143.3 should not extend to the issuance of securities for cash, and subject to the possible application of…GAAR…, where options (including section 7 securities) would otherwise be issued for property, consideration could be given to issuing such options for cash and using the cash to purchase the property that was otherwise to be paid for such options.
Whether share issuance for debt cancellation entails ‘property transferred…to" the corporation (p. 9)
In the context of subsections 143.3(3) and (4), the question is whether property is "transferred to" or services are "provided to" the taxpayer for issuing the share (or interest) in circumstances in which a taxpayer issues a share (or interest) in payment of a debt obligation. While the right to payment should be "property" within the meaning of the definition in subsection 248(1), and while the extinguishment of the right should constitute a "disposition" by the holder, the concern arises in the context of subsections 143.3(3) and (4) since the right may not be transferred to the issuer on the extinguishment as required by these subsections.
…[A]s noted by one commentator: "as a matter of law (real law, not tax law), where a presently payable debt is satisfied by the issuance of fully paid shares of the debtor having the same nominal amount, the issue of shares is treated as if it had been made for cash in the same amount". [fn 49: Robert Couzin, "Debt Restructuring," Corporate Management Tax Conference 1986… ] Similarly, as another commentator stated after reviewing U.K. and Canadian jurisprudence:…
[T]he loan proceeds received by the debtor may be considered advance receipt of the cash subscription price. [fn 50: Wertschek, "Application of a Corporation's Indebtedness to the Issue Price of its Shares Constitutes Full Payment of the Debt," Corporate Structures and Groups, 1992, pp. 16-20.]
Rulings on securities issued to pay principal or interest (p. 10)
CRA has ruled that subsections 143.3(3) and (4)… would not apply to re-determine the relevant amounts in the context of the issuance of trust units in repayment of principal-and-preferred shares in payment of interest [fn 55: …2008-0300101R3, 2008-0300102R3 and 2009-0350481R3… .]…It is…unclear whether the CRA's earlier comment in the context of rebates (i.e., the CRA's view that subsection 143.3(3) would apply such that rebates automatically invested at the issuer's option in common shares would not be deductible by the issuer) continues to reflect the view of the CRA and, if so, how it is to be reconciled with the subsequent rulings [fn 56: … 2006-0176321R3… .]
No express carve-out for money transferred to corporation (pp. 10-11)
Section 143.3 applies to limit the cost of "property" acquired by the taxpayer, and does not include an express carve-out for money. …
It may be that the Department of Finance determined that a clarifying rule was unnecessary since the general scheme of the Act suggests that money does not have a cost amount and that a taxpayer does not realize a gain or loss on the disposition of money, other than in the context of foreign currency fluctuations. [fn 62: That does not mean, however, that money could not have a "cost", such that a clarifying rule would have been welcome.] By way of example:
- paragraph 88(l)(d) refers to "the cost amount to the subsidiary of the property immediately before the winding-up, plus the amount of any money of the subsidiary on hand immediately before the winding-up";…[also citing, ss. 88(1)(d), 87(9), 98(3)(a)(ii), 89(1) – GRIP. 108(1) – cost amount, 132(4)].
Excess is of cost over FMV (p. 6)
Implicit in the [Finance] technical note statements is the assumption that, for purposes of paragraph 143.3(5)(b), the "amount determined to be an excess" under subsections 143.3(3) and (4) is the amount, if any, by which the expenditure as otherwise determined (as opposed, necessarily, to the FMV of the share) exceeds the FMV of the property transferred or issued to, or the services provided to, the issuer for the share (or interest).
No grind if up-front payment (p. 19)
Assume, for example that:
- Taxpayer A purchases capital property from Taxpayer B in exchange for $100, and
- Taxpayer A has a right to recover $20 from Taxpayer B in the event certain conditions are met and it is reasonable to conclude that that right will become exercisable.
Unless subsections 143.4(2) and (3) are read iteratively, it would seem that Taxpayer A's cost of the property in this example is $100 even if the recovery right is considered to be a contingent amount for purposes of the section. Accordingly, given that the relief afforded in subsection 143.4(3) may not be of assistance if a property is no longer owned at the time of payment, planners may wish to give consideration to having amounts paid up-front…
Harshness of s. 12(1)(x) inclusion (pp. 19-20)
[T]he consequences of the paragraph 12(l)(x) regime may seem especially harsh and problematic if the expenditure is a capital expenditure (e.g., where the cost of capital property is affected). In some circumstances, it may be possible to elect under subsection 13(7.4) or 53(2.1) to reduce the cost of the property in place of the paragraph 12(1)(x) income inclusion.
No relief where amount paid (p.20)
Further, there is no rule that parallels the relieving rule in subsection 143.4(3). This means that to the extent subsection 143.4(4) applies but the subsequent contingent amount is ultimately paid (or, assuming section 143.4 is considered to extend to amounts that have been paid and an amount is paid up-front, the right to reduce ceases to exist without any amount being recovered by the taxpayer), it will be necessary to establish recognition for the payment elsewhere in the Act. The provisions that typically apply in the context of a paragraph 12(1)(x) amount (e.g., subsection 39(13) and paragraph 20(1)(hh) may not be of assistance….
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