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: Where the fair market value of the shares that a corporation issues to a shareholder as consideration for property transferred to it is greater than the fair market value of the transferred property what are the income tax implications to the shareholder.
Position: Question of fact - but in the example provided there appears to be no benefit.
Reasons: The law.
XXXXXXXXXX 2000-001016
Attention: XXXXXXXXXX
April 12, 2000
Dear Sirs:
Re: Benefit Conferred on Shareholder
This is in reply to your facsimile dated February 25, 2000 wherein you requested our opinion on the income tax consequences of a transfer of property to a corporation under section 85 of the Income Tax Act ("the Act").
In your facsimile you describe a situation where Mr. A owns 100 common shares of A Ltd. which represents all the issued and outstanding shares of the corporation. The common shares of A Ltd. have an adjusted cost base and paid-up capital of $1 per share and fair market value of $20,000 each. Mr. A owns a non-depreciable capital property (other than shares) that has an adjusted cost base of $1 and has a fair market value of $10,000. Mr. A transfers this capital property to A Ltd. and under section 85 the elected transfer price is $1. As sole consideration for the transfer, A Ltd. issues one additional common share to Mr. A.
You indicate that the fair market value of the common share that A Ltd. issues to Mr. A as consideration for the capital property transfer to it is greater than the fair market value of the transferred property. Your question is what are the income tax implications to Mr. A in this situation.
Your request appears to relate to either a proposed transaction or a completed transaction. Confirmation of the income tax consequences of proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. To make such a request the advance income tax ruling must be submitted in accordance with the guidelines set out in Information Circular 70-6R3 (IC-70-6R3) dated December 30, 1996. However, if the situation relates to a completed transaction a request for the Canada Customs and Revenue Agency's views must be made to your local Tax Services Office. We can, however, provide the following comments.
In general, subsection 15(1) of the Act will apply (subject to the specific exceptions set out therein) where a benefit has been conferred by a corporation on a shareholder. However, it remains a question of fact that must be determined on a case by case basis as to whether, in any particular situation, a benefit has been conferred on a shareholder by a corporation. Using the above situation as an example, and assuming the property transfer does not cause a deemed dividend under section 84 of the Act to arise, it would appear that no benefit under subsection 15(1) would arise since the increase in the fair market value of all the common shares owned by the shareholder immediately after the transfer would not exceed the fair market value of the property transferred to the corporation. However, it is our view that a benefit may be conferred on a shareholder where the shares taken back by the shareholder as consideration are of a different class or if there are other shareholders of the corporation.
In regard to the above, you should also refer to the current version of Interpretation Bulletin IT-432R2: Benefits conferred on shareholders dated February 10, 1995 for additional comments on this topic.
Our comments are provided in accordance with the practice described in paragraph 22 of IC-70-6R3.
Yours truly,
for Director
Reorganizations and International Division
Income Tax Rulings Directorate
Policy and Legislation Branch
- 2 -
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2000
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2000
Email this Content