18 February 2000 External T.I. 1999-0008945 - Purchase of shares from co-owner - GAAR

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.

Principal Issues: Confirmation of position in Question 22 1995 APFF.

Position: No change.

Reasons:

XXXXXXXXXX 1999-000894
D. A. Palamar
Attention: XXXXXXXXXX

February 18, 2000

Dear Sirs:

This is in reply to your letter of July 8, 1998 in which you asked us to confirm our position regarding the application of sections 84.1, 245 and 55 of the Income Tax Act (the "Act") to a specific series of transactions, stated in our answer to Question 22 at the 1995 APFF Conference as follows:

Question 22

Purchase of shares from a co-owner - general anti-avoidance rule.

Mr. A, Mr. B and Mr X each hold a one-third interest in the issued capital stock of Opco. Mr. A and Mr. B wish to purchase the shares of Mr. X in Opco for $100,000. Mr. A and Mr. B form Newco, in which they hold equal shares. Newco purchases the shares of Mr. X in Opco for $100,000 and pays for them by issuing a promissory note for the same amount. Opco buys back the shares of Newco for $100,000. Newco uses that money to repay the $100,000 promissory note issued to Mr. X.

Does Revenue Canada intend to apply section 245 of the Act to this type of transaction?

Answer by the Department of Revenue

We assume that Mr. X and Newco are dealing at arm's length, which means that the provisions of section 84.1 of the Act do not apply. Also, we assume that Opco has, in addition to the liquid assets that will be used to buy back the shares of Newco, assets that it uses in the operation of a business and that Mr. A and Mr. B wish to purchase Mr. X's Opco shares in order to continue that business. The Department considers that this type of transaction does not constitute an abuse in the application of the Act read in its entirety. This transaction is related to the example given in paragraph 4 of Information Circular 88-2, Supplement 1.

Also, the provisions of subsection 55(2) of the Act will not apply to the dividend resulting from the buy-back by Opco of the shares held by Newco, because there was no capital gains reduction, the ACB of the shares being equivalent to their fair market value.

Our Views

We confirm that our position remains as stated. If, however, the facts were that Mr. X was only selling a portion of his shares of Opco to Newco the application of GAAR would be considered.

The above comments represent our general views with respect to the subject matter of your letter and are provided in accordance with our policy set out in paragraph 22 of our Information Circular 70-6R3.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings Directorate
Policy and Legislation Branch

- 3 -