8 March 2001 External T.I. 2000-0060635 - Transfer of shares

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: If section 84.1 "applies" but has no effect can subsection 85(2.1) be applied?

Position: No conclusive response.

Reasons: Need a thorough review of all the facts

XXXXXXXXXX 2000-006063

March 8, 2001

Dear XXXXXXXXXX:

Re: Application of Section 84.1 and Subsection 85(2.1)
of the Income Tax Act ("the Act")

This is in response to your letter dated November 28, 2000, wherein you requested our opinion on the application of the above-noted provisions of the Act in a situation where a Canadian resident individual will transfer shares of a corporation resident in Canada to another corporation resident in Canada on a non-arm's length basis and make an election under section 85 of the Act to defer any capital gain.

In your letter you indicate that the paid-up capital and fair market value of the shares to be transferred by the individual are greater than their adjusted cost base. You also indicate that since both corporations would be connected with each other immediately after the transfer all the conditions set out in the pre-amble of subsection 84.1(1) of the Act appear to be met; however, you state this subsection does not result in a deemed dividend or a reduction in the paid-up capital of the shares issued to the individual by the purchaser corporation.

Your question is whether subsection 85(2.1) can be applied where subsection 84.1(1) does not have any effect.

Your request appears to relate to either a proposed transaction or a completed transaction. Confirmation of the income tax consequences involving a specific taxpayer will only be provided in response to a request for an advance income tax ruling submitted in accordance with the guidelines set out in Information Circular 70-6R4 dated January 29, 2001. However, if the situation described above relates to a completed transaction your request for the Canada Customs and Revenue Agency's views must be made to your local Tax Services Office and all of the relevant facts of the particular situation (including the identity of the particular taxpayers involved) must be provided. We regret that we are unable to provide any meaningful comments on the situation described without a thorough review of all of the relevant facts relating thereto. As noted above, such review will only be considered in response to a request for an advance income tax ruling.

Yours truly,

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