25 June 2001 External T.I. 2001-0087585 - ITA ELECTION

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: Is there a ITA 48.1(1)(c) deemed disposition in a situation where a SBC raises funds in an IPO and, after the election referred to in ITA 48.1(1)(b) is filed, it is determined that the SBC ceased to be such not because its shares (or those of another corporation) were listed on a prescribed stock exchange, as required by ITA 48.1(1)(a)(ii), but rather it ceased to be such prior to the listing of the shares (e.g., it ceased to be a CCPC due to an acquisition of control)?

Position: No.

Reasons: The ITA 48.1(1)(c) deemed disposition occurs if both preconditions in ITA 48.1(1)(a) and (b) are met and they are not met in the situation under consideration.

XXXXXXXXXX 2001-008758
S. Parnanzone
June 25, 2001

Dear XXXXXXXXXX:

Re: Section 48.1 Election - Technical Interpretation

We are replying to your letter of June 5, 2001, concerning the application of section 48.1 of the Income Tax Act (the "Act"). Your letter is further to the matters raised in your letter of November 14, 2000, our reply of May 7, 2001 ( our file 2000-005710), and your subsequent telephone conversation with Mr. S. Parnanzone of this office.

We understand the facts to be as follows:

An individual owns shares (capital property) of a corporation that qualifies as a "small business corporation" (SBC), as this term is defined in subsection 248(1) of the Act. The corporation raises funds through an initial public offering (IPO) and its shares are listed on a prescribed stock exchange. The individual files the election referred to in paragraph 48.1(1)(b) to have section 48.1 of the Act apply. It is subsequently determined that the corporation ceased to be a SBC not because its shares became listed on a prescribed stock exchange as required by subparagraph 48.1(1)(a)(ii) of the Act, but rather during the IPO process prior to the corporation's shares being listed on the exchange (e.g., an acquisition of control that resulted in the corporation ceasing to be a Canadian-controlled private corporation).

In your view, in the above situation there should not be a capital gain being triggered by a deemed disposition under paragraph 48.1(1)(c). You stated your concerns as follows:

The fact that the section 48.1 election could be in force as a result of filing an election, will mean that the individual would have a capital gain arising as a result of the election, but they would not be able to qualify for the capital gains exemption pursuant to section 110.6. In Windows document 9916575, CCRA has indicated that an election under section 48.1(1) cannot be amended or revoked. The relief to the taxpayer would be that if the pre-conditions for section 48.1 were not met, that the election should be a nullity, and therefore there should be no capital gains.

Our comments

The particular circumstances in your letter on which you have asked for our views appear to be a factual situation involving a specific taxpayer. As explained in Information Circular 70-6R4, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate tax services office for their views. However, we are prepared to offer the following general comments, which may be of assistance.

Subsection 48.1(1) of the Act essentially provides that where both preconditions in paragraphs (a) and (b) thereof are met, the shares subject to the election are deemed by paragraph (c) thereof to be disposed for proceeds of disposition that the elector may designate between the adjusted cost base and the fair market value, and by paragraph (d) thereof to be reacquired at a cost equal to those deemed proceeds of disposition. The shares' deemed disposition may result in a capital gain which may be eligible for the capital gains deduction in section 110.6, to the extent that the other requirements of this latter tax provision are met. The deemed reacquisition may result in a "bump" in the cost of the shares.

In the situation you described, the precondition in paragraph 48.1(1)(a) of the Act is not satisfied because the SBC does not cease to be such because a class of its shares (or shares of another corporation) are listed on a prescribed stock exchange. Consequently, there is no deemed disposition and reacquisition of the shares under paragraphs 48.1(1)(c) and (d) of the Act, respectively, meaning that there is no capital gain or "bump" in the cost of the shares.

In summary, your concern that in the situation you described there is a capital gain from a deemed disposition of the shares pursuant to paragraph 48.1(1)(c) of the Act does not seem to be supported by an analysis of section 48.1 of the Act as a whole.

We trust that the foregoing comments are of assistance.

Yours truly,

Milled Azzi, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate

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