Translation disclaimer
This translation was prepared by Tax Interpretations Inc. The CRA did not issue this document in the language in which it now appears, and is not responsible for any errors in its translation that might impact a reader’s understanding of it or the position(s) taken therein. See also the general Disclaimer below.
Principal Issues: [TaxInterpretations translation]
1. At the time of a securities exchange to which subsection 7(1.5) applies and sections 85 and 85.1 of the Act do not apply, must the taxpayer be taxed on the capital gain, given that a benefit will be included under section 7 at the time of the disposition?
2. Does subsection 7(1.3) apply to all of the securities acquired in an exchange where subsection 7(1.5) applies only to some of the securities? If not, what is the order of disposition?
Position:
1. Yes.
2. No. Pro rata.
Reasons:
1. The exchange results in the disposition of securities that gives rise to a capital gain without the realization of the benefit under section 7 of the Act. However, the employment benefit will be reflected in the year of the actual disposition of the securities. At that time, the benefit will result in a reduction of the capital gain or a capital loss. (See 991926, 972531, 950040 and 933266)
2. See the penultimate paragraph of the letter.
XXXXXXXXXX 1999-001399
L. J. Roy, CGA
Attention: XXXXXXXXXX March 22, 2000
Dear Sir,
Subject: Exchange of securities
This is in response to your letter dated November 30, 1999 requesting confirmation of your interpretation of the relevant provisions of the Income Tax Act (the “Act”) in a hypothetical situation. We apologize for the delay in responding to your request.
The situation described in your letter appears to us to be an actual situation involving a taxpayer. As stated in paragraph 22 of Information Circular 70-6R3 dated December 30, 1996, it is the practice of our Directorate not to issue written opinions regarding proposed transactions otherwise than by way of advance income tax rulings. Furthermore, when it comes to whether a completed transaction has received appropriate tax treatment, that determination rests first with our Tax Services Offices. However, we can offer the following general comments that we hope may be helpful to you.
Subsection 7(1.5) of the Act provides special rules when certain conditions are satisfied. For the purposes of section 7 and paragraph 110(1)(d.1), subsection 7(1.5) provides that
• the taxpayer is deemed not to have disposed of or exchanged the exchanged securities and not to have acquired the new securities;
• the new securities are deemed to be the same securities as, and a continuation of, the exchanged securities;
• the corporation that issued the new securities is deemed to be the same corporation as the corporation that issued the old securities and to be a continuation of the old corporation.
• the new securities are deemed to have been issued under the same option agreement, if any, as the old shares
In the case of a securities exchange to which subsections 85 and 85.1 do not apply and subsection 7(1.5) applies, we are of the view that the taxpayer must report the capital gain at the time of the exchange even though the benefit under section 7 will be included in the year of the subsequent disposition of the new shares.
With respect to the possibility of claiming a reserve in circumstances where the new securities are received over a period of time, we are of the view that subparagraph 40(1)(a)(iii) may apply. In that respect, please refer to Interpretation Bulletin IT-236R4.
At the time of the subsequent disposition, the amount of the benefit included under section 7 will be added under paragraph 53(1)(j) to the cost of the securities that is equal to the proceeds of disposition at the time of the exchange. Contrary to your contention, there is no double taxation since the capital gain at the time of the disposition is reduced by the effect of paragraph 53(1)(j). Furthermore, if there is no increase in the value of the securities after the exchange, the disposition will result in a capital loss.
Subsection 7(1.3) applies for the purposes of subsection 7(1.1) and provides that a taxpayer is deemed to dispose of securities that are identical properties in the order in which the taxpayer acquired them. Since subsection 7(1.5) applies to section 7, it applies to section 7(1.3). Consequently, only the new securities acquired in exchange for the old securities described in subsection 7(1.5) constitute identical properties. In a situation where only some of the securities exchanged are subject to section 7, we are of the view that subsection 7(1.3) would not apply to establish an order of disposition between the shares subject to and not subject to section 7. However, we acknowledge that securities with the same characteristics are otherwise identical properties and that it is not possible to identify which securities are actually sold. We therefore consider it reasonable to claim that the securities are disposed of in proportion to each type of share.
These opinions do not constitute advance rulings and, as stated in paragraph 22 of Information Circular 70-6R3 dated December 30, 1996, are not binding on the Department.
Best regards,
Manager
Financing and Plans Section
Financial Industries Division
Income Tax Rulings Directorate
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