Principal Issues:
A taxpayer receives shares, which do not meet the definition of prescribed shares for the purposes of section 6205 of the Regulations and dividends are not paid on these shares. The taxpayer exchanges all outstanding shares (special and common) of the corporation in exchange for new special shares. The new special shares would be prescribed shares. The taxpayer then subscribes for new common shares of the corporation at nominal value. Immediately following the share subscription, the taxpayer gifts the common shares to his adult children.
1. Would the gain, if any, realized on the new special shares be eligible for the capital gains deduction since a significant portion of the gain attributable to those shares was attributable to the fact that dividends were not paid on non-prescribed shares?
2. Would subsection 110.6(8) of the Act apply to deny the capital gains deduction in respect of any capital gains realized by the children in the future on the sale of their common share?.
Position:
1. Question of fact but subsection 110.6(8) of the Act would apply.
2. Question of fact but likely subsection 110.6(8) would not apply.
Reasons: See files # 5M08340, 58311, 9225415, 941399, 9816165, 9700935, 931860, 9306161, 9309051, and 9309041.