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. Application of grandfathering of shares for the purpose of the stop loss rules of subsection 112(3) to (3.2) of the Act.
2. Whether a change in ownership and a change to the shareholders' agreement will affect the application of the grandfathering provisions.
Position:
1. Not necessarily grandfathered.
2. Likely no effect on grandfathered status.
Reasons:
1. No documentary evidence provided to suggest that the redemption, cancellation or acquisition of the specific shares was contemplated.
2. The changes will not affect the grandfathered status as shares provided the conditions set out in paragraph 131(1)(b) of S.C. 1998, c.19 relating to the life insurance policy are otherwise met.
2001-006619
XXXXXXXXXX Karen Power, C.A.
(613) 957-8953
August 3, 2001
Dear Sirs:
Re: Stop Loss Rules and Grandfathered Shares
We are writing in reply to your letter of January 15, 2001 wherein you requested our opinion regarding the application of subsection 112(3) of the Income Tax Act (the "Act") to the various circumstances described therein. Specifically, you have asked that we comment on whether certain shares would be grandfathered under the transitional provisions to subsection 112(3) of the Act which are contained in subsection 131(11) of S.C. 1998, c.19.
The particular circumstances in your letter on which you have asked for our views appears to be a factual situation involving a specific taxpayer. The review of such situations is the responsibility of the Taxation Services Offices and it is the practice of the Canada Customs and Revenue Agency not to comment on such transactions when the identities of the taxpayers are not known. We can, however, provide you with the following general comments which we hope will be of assistance.
The "stop loss" rules set out in subsection 112(3) to (3.2) of the Act may reduce the loss from the disposition of a share held as a capital property by the amount of tax-free dividends received on the share subject to certain grandfathering rules. The grandfathering rules to subsection 112(3) of the Act will apply to a disposition of a share held as capital property by an individual any time after April 26, 1995 if the share was owned by the individual on April 26, 1995, and inter alia:
(a) the disposition occurs pursuant to a written agreement made before April 27, 1995 (the "grandfathered agreement") and such agreement is not subsequently altered or modified in any way; or
(b) the disposition was made to the corporation that issued the share and on April 26, 1995 a corporation, or a partnership of which a corporation is a member, is a beneficiary of a life insurance policy that insured the life of the individual or the individual's spouse and it was reasonable to conclude on April 26, 1995 that a main purpose of the life insurance was to fund, directly or indirectly, in whole or in part, a redemption, acquisition or cancellation of the share by the corporation that issued the share (the "grandfathered policy").
For the purpose of the rule in (b) above, the taxpayer must be able demonstrate that the requirements described under (b) actually existed on April 26, 1995. For example, one requirement is that a main purpose for the acquisition of the life insurance policy was to fund, directly or indirectly, in whole or in part, a redemption, acquisition or cancellation of the share.
In the situation you describe, we agree with your views that the words "directly or indirectly" found in subparagraph 131(11)(b)(iii) of S.C. 1998, c.19 are sufficiently broad to encompass a situation where life insurance proceeds are allocated to the Estate of the Deceased indirectly as you've described, however, only where it is reasonable to conclude that such an indirect transfer was contemplated on the acquisition of the life insurance.
One of the main purposes for the acquisition of the life insurance policy must have been to fund a redemption, acquisition or cancellation of the share. In order to determine whether, in your situation, the shares issued by Aco. and Bco. to Mr. A and Mr. B respectively, would be grandfathered, it must be reasonable to assume that the life insurance proceeds would be used to cancel, acquire or redeem those specific shares. In our view, nothing in the provisions of the shareholders' agreement outlined in your letter in paragraph 5, contemplates the redemption, cancellation or acquisition of the shares issued by Aco. and Bco. to Mr. A and Mr. B respectively.
However, if any other documentary evidence is available to substantiate that the redemption, cancellation or acquisition of the shares issued by Aco. and Bco. to Mr. A and Mr. B was contemplated as part of the transactions described in paragraph 5 of your letter, it is possible that such shares would be grandfathered pursuant to paragraph 131(11)(b) of the S.C. 1998, c.19.
Where it is determined that the shares would be grandfathered pursuant to paragraph 131(11)(b) of the S.C. 1998, c.19, the transfer of the life insurance policies by Aco. and Bco. to Opco and the cancellation of the 1992 shareholders' agreement will not in and of themselves, result in a loss of grandfathered status of the shares.
We trust our comments will be 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.
Yours truly,
for Director
Reorganizations and International Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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