26 January 2000 Ruling 2000-0001833 - CAPITAL GAINS CRYSTALLIZATION

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: 1. Whether the conversion of common shares into preferred shares is a disposition for purposes of the election under subsection 85(1)?

2. Whether transactions designed to crystallize the capital gains exemption are subject to GAAR?

Position: 1. Yes.

2. No.

Reasons: 1. Pursuant to our position at the 1991 Round Table and numerous letters.

2. Pursuant to our position as stated at the 1988 Round Table.

XXXXXXXXXX 								2000-000183
F. Francis
January 26, 2000

Dear Madam:

Re: Advance income tax ruling request -XXXXXXXXXX

Further to our telephone conversation of January 24, 2000, (XXXXXXXXXX/Francis), this confirms that you have withdrawn the request for an advance income tax ruling dated January 6, 2000, submitted on behalf of the above-noted taxpayers.

You have requested our general comments in respect of a situation wherein two shareholders of a Canadian-controlled private corporation convert their common shares in exchange for voting preferred shares and file an election under subsection 85(1) of the Income Tax Act (the "Act"). In particular, you enquire as to whether the conversion of common shares into preferred shares would be considered as a disposition for purposes of section 85 of the Act. You further enquire as to whether subsection 245(2) of the Act would apply to a series of transactions designed to crystallize the capital gains exemption.

As stated in the response to question 20 of the Revenue Canada Round Table at the 1991 annual conference of the Canadian Tax Foundation, provided that the preferred shares issued in exchange for the common shares have sufficiently different rights that a disposition occurs, it is our view that there is a disposition to the corporation and that an election under subsection 85(1) of the Act is available in respect of the disposition. It is also our view that a disposition made to permit the claiming of the capital gains exemption would not generally constitute a misuse or abuse for purposes of subsection 245(4) and that, consequently, subsection 245(2) would not generally apply to such a disposition.

We trust the above comments are of assistance to you. However, as noted in Information Circular 70-6R3 issued on December 30, 1996, the above comments are not binding on the Canada Customs and Revenue Agency.

A refund of your deposit will be sent under separate cover.

Yours truly,

Mark Symes
Manager
Corporate Reorganizations Section
Reorganizations and International Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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