16 January 2004 External T.I. 2003-0026225 - SECTION 85 TRANSFER AND SUBSEQUENT SALE85(1)

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues:

Whether appreciated capital property held by a corporation and which is transferred on a tax deferred basis under subsection 85(1) to a sister corporation remains capital in nature if the transferred property is immediately disposed of by the sister corporation to an arm's length third party?

Position TAKEN: None. Question of fact.

Reasons FOR POSITION TAKEN:

The CCRA has stated on several occasions that where a corporate taxpayer has acquired, on a section 85 "rollover" property that was non-depreciable capital property of a controlling shareholder or a "sister" corporation, it was prepared to accept that the nature of the transferred property would not have changed solely because the taxpayer resold the property soon after the rollover.

XXXXXXXXXX                                2003-002622
P. Diguer, CGA
January 16, 2004 

Dear XXXXXXXXXX:

Re: Characterization of sale of shares

We are writing in response to your facsimile dated June 24, 2003 in which you request our views in regard to characterization of a sale of shares as on income account or capital account in the specific situation described in your facsimile.

In particular, you describe a situation where a taxpayer that is a corporation ("A Co") holding appreciated capital property that is shares of another corporation ("X Co") transferred the shares on a tax deferred basis under subsection 85(1) to a sister corporation ("B Co"). B Co immediately disposes of the shares to an arm's length third party.

You ask

Whether the shares of X Co are capital property to B Co (the sister corporation) at the time of the sale to the third party?

Our comments

The situation that is described in your letter appears to involve a series of completed transactions involving specific taxpayers. Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular IC-70-6R5 dated May 17, 2002. Where the particular transaction is completed, the inquiry should be addressed to the relevant Tax Services Office. Although we are unable to provide any opinion in respect of the specific transactions described in your letter, we have set out some general comments which we hope are of assistance to you. However, written opinions are not advance tax rulings and, accordingly not binding on the Agency.

Whether or not a particular transaction is of an income nature or a capital transaction is a question of fact and can only be determined upon the review of the facts in a particular case.

However, the CCRA has indicated at several tax conferences¹ that in situations where a corporate taxpayer has acquired, on a section 85 "rollover" property that was non-depreciable capital property of a controlling shareholder or a "sister" corporation, it was prepared to accept that the nature of the transferred property would not have changed solely because the taxpayer resold the property soon after the rollover. Our position remains as stated at the earlier mentioned conferences and is reflected in paragraph 26 of Interpretation Bulletin IT-291R3 released on January 12, 2004 (copy enclosed).

We trust our comments will be of assistance to you.

Yours truly,

Steve Tevlin
Manager
Corporate Financing Section
Financial Industries Division
Income Tax Rulings Directorate

Encl.

ENDNOTES

¹ See Revenue Canada Round Table in the 1984 Conference Report, Canadian Tax Foundation, question #49

See "Revenue Canada Review" in the 1995 Conference Report, Canadian Tax Foundation, 52.1 - 52.12 at 52.8. See also ITTN No. 7 dated February 21, 1996.