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: Is the adjusted cost base of shares reduced by subsection 84.1(2) in this situation?
Position: Yes
Reasons: The law.
XXXXXXXXXX 2005-011829
Michael Cooke
March 7, 2005
Dear XXXXXXXXXX:
Re: Application of Section 84.1
This is in reply to your letter dated February 21, 2005 wherein you requested our opinion on the application of section 84.1 of the Income Tax Act (the "Act") to the fact situation described below.
A Canadian resident individual ("Mr. X") owned shares of a taxable Canadian corporation ("Opco") that were acquired by him prior to 1972. Since Mr. X had no other surviving relatives, Mr. X's will provided that his shares of Opco were to be transferred to certain individuals who have been long time employees of Opco (the "Employees"). None of the Employees was related to Mr. X and each of the Employees is a person resident in Canada.
As a result of Mr. X's death, a capital gains exemption was claimed on Mr. X's final income tax return in respect of the capital gain arising from the deemed disposition of his Opco shares and the Employees acquired the shares of Opco from Mr. X's estate in accordance with the terms of Mr. X's will. The adjusted cost base to the Employees of the Opco shares was equal to the fair market value of such shares at the time of Mr. X's death.
The Employees would like to transfer their Opco shares to a non-arm's length corporation that is resident in Canada ("Holdco") and take back non-share consideration equal to the adjusted cost base of their Opco shares. However, since immediately after the transfer Opco would be connected with Holdco, the rules in section 84.1 must be considered.
It is your view that, for the purposes of applying paragraph 84.1(2)(a.1) in computing the adjusted cost base of the Employees' Opco shares, the Employees will be deemed to not deal at arm's length with Mr. X even if factually such Employees did deal at arm's length with Mr. X while he was alive. This arises because of the following. On the transfer of Mr. X's Opco shares to his estate, Mr. X was considered not to deal at arm's length with his estate. Since the Employees are beneficiaries of Mr. X's estate, pursuant to paragraph 84.1(2)(d), each of the Employees is deemed to not deal at arm's length with Mr. X's estate. Therefore, as a result of the transfer of the Opco shares by Mr. X's estate to the Employees, pursuant to paragraph 84.1(2.01)(c), each of the Employees is also deemed not to be dealing at arm's length with Mr. X at all times.
You indicate that if Mr. X had simply gifted the Opco shares to the Employees before he died, each of the Employees could have received an amount of non-share consideration from Holdco equal to their actual adjusted cost base (i.e. essentially the fair market value of the Opco shares at that time the gift was made - see paragraph 69(1)(c)) provided it was otherwise factually determined that each of the Employees and Mr. X were dealing at arm's length.
Your question is whether it is appropriate for the adjusted cost base of the Employees' Opco shares to be reduced by subsection 84.1(2) as described above and, if not, would we be prepared to recommend to the Department of Finance that a technical amendment be made to provide relief in these types of circumstances.
The fact situation described in your letter appears to relate to either a proposed transaction or a completed transaction. Confirmation of the income tax consequences of proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. To make such a request the advance income tax ruling must be submitted in accordance with the guidelines set out in Information Circular 70-6R5 dated May 17, 2002 ("IC 70-6R5"). However, if the situation relates to a completed transaction a request for the Canada Revenue Agency's ("CRA") views must be made to your local Tax Services Office. Notwithstanding the above, we are prepared to offer the following general comments.
We agree with you that for the purposes of applying the rules in paragraph 84.1(2)(a.1) Mr. X and the Employees would be considered to not deal at arm's length. We have sent a copy of this letter to the Department of Finance for their consideration.
We trust that our comments will be of assistance to you. However, as stated in paragraph 22 of Information Circular 70-6R5, the opinion expressed in this letter is not a ruling and consequently is not binding on the CRA.
Yours truly,
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Planning Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2005
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2005
Email this Content