22 January 1992 Income Tax Severed Letter 172B

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 Department. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Subject: BENEFIT CONFERRED AND GAAR Section(s): 85(1)(e.2), 245(2), 85(1.3)]

913255
S. Leung
(613) 957-2115

XXX

Attention: XXX

January 22, 1992

Dear Sirs:

Re: Subsections 85(1) and 245(2)
of the Income Tax Act (the “Act”)

We are writing in response to your letter of November 19, 1991 wherein you requested our confirmation of your interpretation of paragraph 85(1)(e.2) and subsection 245(2) of the Act as they apply to the following hypothetical situation outlined in your letter:

The Hypothetical Situation

• 1. Mr. A is an individual who is a beneficial owner of an interest in a piece of real estate in Ontario. The legal title to the real estate may or may not be held by a bare trustee corporation.
• 2. Mr. A owns all of the shares of A Corp.
• 3. Mr. B owns all of the shares of B Corp. He also owns an interest in a piece of real estate in Ontario.
• 4. Mr. A transfers his beneficial interest in the real estate he owns to A Corp and as sole consideration therefor receives redeemable and retractable special shares having an aggregate fair market value and redemption amount of $100. Mr. A and A Corp jointly file an election under subsection 85(1) of the Act in respect of the transferred property.
• 5. A Corp then redeems all of its special shares that were issued to Mr. A as a result of the transfer described in 4 above for their aggregate redemption amount of $100.
• 6. Mr. B transfers his beneficial interest in the real estate he owns to B Corp and as sole consideration therefor receives redeemable and retractable special shares having an aggregate fair market value and redemption amount of $100. Mr. B and B Corp jointly file an election under subsection 85(1) of the Act in respect of the transferred property. 7. B Corp redeems all of its special shares that were issued to Mr. B as a result of the transfer described in 6 above for their aggregate redemption amount of $100.
• 8. A Corp and B Corp amalgamate with a resulting share capital reflecting the underlying value of the real estate interests held by A Corp and B Corp.

You stated in your letter that the purpose of the transfers of the beneficial interests in the real estate by the individuals to their respective corporation is either to

• (a) have the real estate owned by a corporation which will qualify as a principal business corporation described in subsection 1100(12) of the Income Tax Regulations; or
• (b) isolate themselves from any personal liability that might arise as a result of ownership of the real estate.

It is your view that paragraph 85(1)(e.2), as amended under the Draft Amendments to the Income Tax Act and Related Statues issued by the Minister of Finance on July 13, 1990, would not apply to the transfers of the real estate by the individuals to their respective corporation even though the respective consideration that is received by them has an aggregate fair market value less than the fair market value of the transferred property.

It is also your view that other than the deemed dividend of $100 arising as a result of the redemption of the special shares of A Corp or B Corp, there would not be any other tax consequences to such redemption of shares. Furthermore, it is your view that the general anti-avoidance rule (“GAAR”) contained in subsection 245(2) of the Act would not apply to the amalgamation of A Corp and B Corp.

Our Comments

The situation outlined in your letter appears to relate to actual proposed transactions involving identifiable taxpayers. Confirmation as to the income tax consequences of proposed transactions can only be given in the context of an advance income tax ruling. The procedures for making a request for an advance income tax ruling are outlined in Information Circular 70-6R2, dated September 28, 1990, issued by Revenue Canada, Taxation. However, we can offer the following general comments.

Bill C-18, which contains the proposed amendments to paragraph 85(1)(e.2) of the Act referred to in your letter, received Royal Assent on December 17, 1991 and is now law as S.C. 1991, c.49. Paragraph 85(1)(e.2), as amended, provides, inter alia, that its provisions do not apply in respect of benefits conferred by a taxpayer on a transfer of property, pursuant to the provisions of section 85 of the Act, to a corporation which is a wholly owned corporation of the taxpayer immediately after the transfer. The term “wholly owned corporation” is defined by new subsection 85(1.3) of the Act.

The determination of whether subsection 245(2) of the Act would or would not apply to a given situation is a question of fact which can only be determined following a review of all of the relevant facts and circumstances of the particular situation. As we do not have all the facts of the situation outlined in your letter, including the purpose of the amalgamation of A Corp and B Corp, we regret that we are not able to comment on whether the provisions of subsection 245(2) of the Act would or would not be applied to the situation described in your letter. In this regard, you may wish to consider applying for an advance income tax ruling at which time all the facts relating to the particular situation could be reviewed.

Our comments should not be construed as implying that none of the other provisions of the Act, such as subsection 69(11), would not apply to the transactions outlined above. Also these comments are not rulings and are provided in accordance with the practice referred to in paragraph 21 of Information Circular 70-6R2.

Yours truly,

for Director
Reorganizations and Foreign Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch