9 October 2015 APFF Roundtable Q. 7, 2015-0595561C6 F - Computation of adjusted cost base and section 84.1 -- translation

Principal Issues: In a given scenario, whether subparagraph 84.1(2)(a.1)(ii) applies to reduce the adjusted cost base of shares for the purpose of section 84.1?

Position: Yes.

Reasons: Wording of the Act.

9 OCTOBER 2015 FEDERAL TAX ROUNDTABLE
2015 APFF CONFERENCE

Q. 7 Application of ITA section 84.1

Facts

In 2010, Mr. X subscribed for 100 common shares for $100,000 in the capital stock of a newly incorporated company. The shares' paid-up capital ("PUC") and the adjusted cost base ("ACB") thus were $100,000.

Mr. X died in 2015 when the 100 common shares were worth $200,000. Since the capital gains deduction ("CGD") criteria under subsection 110.6(2.1) ITA were met, an amount of $100,000 was deducted in Mr. X's 2015 income tax return under this subsection.

His son inherited the 100 common shares of the corporation. By way of resolution, the corporation reduced the PUC of the 100 common shares by $99,000 with cash of $99,000 thereby distributed. The ACB of the shares for the son was then $101,000. Subsequently, the son wished to transfer his shares to his holding company.

Question to CRA

For the purposes of section 84.1, what is the ACB of the 100 common shares at the time of their transfer to the holding company? In particular, does s. 84.1(2)(a.1)(ii) apply to reduce their ACB by $99,000?

CRA Response

To begin with, we take it as given for these purposes that the 100 common shares in the capital of the corporation constitute capital property of X on his death. We also assume that the conditions for the application of section 84.1 apply to the transfer by the son of the 100 common shares in the capital of the corporation to his holding company.

In order to determine if subparagraph 84.1(2)(a.1)(ii) applies for purposes of section 84.1 so as to reduce the ACB (otherwise determined) to the son of the 100 common shares of the corporation, it is necessary to establish, first, if the shares were acquired by the son after 1971 from a person with whom he did not deal at arm’s length and, second, if a deduction under section 110.6 was claimed respecting a previous disposition of the shares by the son or by an individual with whom the son did not deal at arm’s length.

Taking as given that, for purposes of the Income Tax Act, the 100 common shares in the capital of the corporation were transferred by X to an estate, followed by their transfer by the estate to the son, we are of the view that the first condition, mentioned above, for the application of subparagraph 84.1(2)(a.1)(ii) would be satisfied. According to paragraph 84.1(2)(d), for the purposes of section 84.1, a trust and a beneficiary of the trust or a person related to a beneficiary of the trust shall be deemed not to deal with each other at arm’s length. In this case, since the son is a beneficiary of the estate of X, he would thus be deemed to not deal at arm’s length with the estate respecting this disposition. It should be noted that the son also would be deemed to not deal at arm’s length with the estate of X by virtue of paragraph 251(1)(b). Thus, the 100 common shares in the capital of the corporation were acquired by the son after 1971 from a person, being the estate of X, with whom he did not deal at arm’s length.

For purposes of determining if the second condition, stated above, for the application of subparagraph 84.1(2)(a.1)(ii) was satisfied, we are of the view that, in accordance with the wording of this legislative provision, the relationship between the parties is to be evaluated at the moment giving rise to the application of section 110.6. By virtue of paragraph 70(5)(a), X was deemed to have disposed of the shares of the corporation immediately before his death. The capital gain of $100,000 was thereby realized, and the equivalent deduction by virtue of section 110.6 was claimed, at the moment when X and his son were deemed to not deal with each other at arm’s length by virtue of paragraphs 251(1)(a), 251(2)(a) and 251(6)(a). Thus, the second condition for the application of subparagraph 84.1(2)(a.1)(ii) was satisfied in this case.

Consequently, we are of the view that the provisions of subparagraph 84.1(2)(a.1)(ii) applied in the given situation to reduce the ACB of the 100 common shares of the corporation held by the son by an amount equal to the deduction under section 110.6 claimed by X, namely, $100,000.

The fact the corporation had already effected a reduction of its PUC in an amount of $99,000 through a payment of the sum of $99,000 in money would not affect the determination as to whether subparagraph 84.1(2)(a.1)(ii) applied in this case. The $99,000 amount reduced, by virtue of subparagraph 53(2)(a)(ii), the ACB otherwise determined of the shares ($200,000 - $99,0000 = $101,000). This ACB of $101,000 was, in turn, reduced by the amount provided under subparagraph 84.1(2)(a.1)(ii), namely, $100,000. Consequently, for purposes of the application of section 84.1, the ACB to the son at the moment of the transfer to his holding company of the 100 common shares in the capital of the corporation would be $1,000.

Annie Mailhot-Gamelin
(514) 283-8653
October 2015
2015-059556