7 February 2005 External T.I. 2004-0093851E5 - IT-115R2

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.

Principal Issues: Whether the administrative position described in paragraph 3 of IT-115R2 is still our current position?

Position: Yes. However, where a taxpayer is seeking to rely on this administrative position in an abusive situation, such as where the cash amount received by the taxpayer for its fractional share on a share exchange is a significant amount, the taxpayer must report a deemed dividend under subsection 84(3) to the extent that the cash amount received exceeds the paid-up capital of its fractional share and any gain or loss from the disposition of its fractional share.

Reasons: See above.

2004-009385
XXXXXXXXXX Daniel Wong
(613) 954-4949
February 7, 2005

Dear XXXXXXXXXX:

Re: Technical Interpretation Request: Share exchange

This is in reply to your letter of September 1, 2004 wherein you requested that we confirm our administrative position, described in paragraph 3 of IT-115R2 (Fractional Interest in Shares), concerning the treatment of a taxpayer that exchanges its shares of a corporation for shares of the corporation plus a cash amount in lieu of a fractional share of the corporation. Further, you queried whether we would extend that administrative position to a taxpayer that only receives cash in exchange for its shares of the corporation.

Our Comments

As set out in paragraph 3 of IT-115R2, where a taxpayer exchanges its old shares of a corporation, which are capital property of the taxpayer, for new shares of the corporation plus a cash amount in lieu of a fractional share of the corporation that the taxpayer is entitled to receive on the exchange, subsection 51(1) generally will apply to the exchange. This is so notwithstanding that subsection 51(1) requires that no consideration other than new shares of the corporation be received by the taxpayer on the exchange. Further, if the cash amount received for the fractional share

(a) is less than $200, the taxpayer may either report a gain or loss from the disposition of its fractional share based on the amount received, or alternatively, reduce its adjusted cost base of the shares that it received on the exchange by that cash amount; or

(b) is more than $200, the taxpayer must report a gain or loss from the disposition of its fractional share based on the amount received.

The administrative position described above is still our current position. However, in our view, where a taxpayer is seeking to rely on this administrative position in an abusive situation, such as where the cash amount is a significant amount, the options described in (a) and (b) above would not be available to the taxpayer. Instead, the taxpayer must report, to the extent that cash amount exceeds the paid-up capital of the fractional share that the taxpayer is entitled to receive on the exchange, a deemed dividend under subsection 84(3) and any gain or loss, as the case may be, from the disposition of its fractional share.

Lastly, there is no basis for extending this administrative position to a taxpayer that only receives cash in exchange for its shares of the corporation. In that case, the taxpayer must report a deemed dividend under subsection 84(3) to the extent that the cash amount received exceeds the paid-up capital of those shares and any gain or loss from the disposition of its shares on the exchange.

These comments are provided in accordance with paragraph 22 of Information Circular 70-6R5.

Yours truly,

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