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: Determination of adjusted cost base of shares for the purposes of s. 84.1(1) of the Act when portion of shares have been disposed of previously by parties not dealing at arm's length with taxpayer and resulting capital gains have been sheltered under s. 110.6 by those non-arm's length parties.
Position: General comments given. Wording of subparagraph 84.1(2)(a.1)(ii) reduces adjusted cost base of shares on a share-by-share basis, so if a share held by a taxpayer has not been previously disposed of by the taxpayer or non-arm's length individual or the taxpayer can demonstrate that no s. 110.6 claims have been made in respect of a previous disposition of the share, s. 84.1(2)(a.1)(ii) will not reduce the adjusted cost base of that share for s. 84.1 purposes even though the taxpayer may also hold identical shares for which such reductions are required. With respect to designating shares that have been the subject of previous s. 110.6 claims, Agency will not necessarily accept a designation where the taxpayer has disposed of shares of that class in a previous taxation year, unless a designation was filed with the return of income for that previous taxation year.
Reasons: Wording of the legislation.
2005-016362
XXXXXXXXXX J. MacGillivray
(613) 957-2053
August 9, 2006
Dear Sir:
Re: Subparagraph 84.1(2)(a.1)(ii) and Section 110.6
We are writing in response to your letter of December 14, 2005 in which you requested our views with respect to the determination of the adjusted cost base of shares of a corporation for the purposes of section 84.1 of the Income Tax Act (Canada) (the "Act"). Reference is also made to our telephone conversation of June 16, 2006 (MacGillivray/XXXXXXXXXX ). We apologize for the delay in responding to your inquiry.
You have described the following scenario:
1. Mr. A, Mr. B, Mr. C and Mr. D are Canadian-resident individuals who are related to each other for the purposes of the Act.
2. Canco, a "Canadian corporation" for the purposes of the Act, was incorporated by Mr. A, Mr. B, Mr. C and Mr. D. On incorporation, Canco issued shares of its capital stock ("Canco Shares") to these individuals as follows:
(a) Mr. A XXXXXXXXXX Canco Shares
(b) Mr. B XXXXXXXXXX Canco Shares
(c) Mr. C XXXXXXXXXX Canco Shares
(d) Mr. D XXXXXXXXXX Canco Shares
3. Mr. A subsequently acquired all of the Canco Shares held by Mr. B, Mr. C and Mr. D for proceeds of disposition equal to their fair market value. Mr. B did not claim any deduction under section 110.6 of the Act with respect to the disposition of his XXXXXXXXXX Canco Shares to Mr. A, while Mr. C and Mr. D claimed deductions under subsection 110.6(2.1) of the Act for the taxation year in which their respective dispositions of Canco Shares to Mr. A occurred. The amounts deducted under subsection 110.6(2.1) by Mr. C and Mr. D were equal to the amounts determined under subparagraph 40(1)(a)(i) in respect of their dispositions of Canco Shares to Mr. A.
4. Mr. A subsequently sold back XXXXXXXXXX Canco Shares to Mr. B for proceeds of disposition equal to their fair market value. Mr. A also sold another XXXXXXXXXX Canco Shares to an arm's-length third party for proceeds of disposition equal to their fair market value. Mr. A did not claim any deduction under section 110.6 of the Act with respect to these dispositions.
5. The fair market value of the Canco Shares subsequently declined and Mr. A repurchased XXXXXXXXXX of the XXXXXXXXXX Canco Shares from Mr. B that Mr. A had sold to Mr. B as described above. Mr. B did not claim any deduction under section 110.6 of the Act with respect to this disposition.
The fair market value of the Canco Shares has subsequently increased. Mr. A wishes to transfer his XXXXXXXXXX Canco Shares to his personal holding company ("Holdco") on a tax-deferred basis under section 85 of the Act. Mr. A would also like to take back non-share consideration on this transfer to the maximum extent possible without being deemed to have received a dividend pursuant to paragraph 84.1(1)(b). In doing so, Mr. A wishes to designate two distinct blocks of Canco Shares in his return of income for the year in which the transfer to Holdco takes place. One block would consist of XXXXXXXXXX Canco Shares while the other would consist of XXXXXXXXXX Canco Shares. It appears that the second block of XXXXXXXXXX Canco Shares have been distinguished from the first block on the basis that the second block of Canco Shares represents the XXXXXXXXXX Canco Shares repurchased by Mr. A from Mr. B as described in paragraph 5 above.
You have computed the total adjusted cost base of the XXXXXXXXXX Canco Shares held by Mr. A and have allocated a pro-rata portion of that amount to each block of Canco Shares in accordance with subsection 47(1) of the Act. In addition, you have calculated the amounts that you believe are required to be deducted from the adjusted cost base of each block of Canco Shares pursuant to subparagraph 84.1(2)(a.1)(ii) of the Act for the purposes of determining the adjusted cost base of the Canco Shares for the purposes of paragraph 84.1(1)(b) of the Act. In this regard, you have determined that the adjusted cost base of the XXXXXXXXXX Canco Shares otherwise determined should be reduced by a XXXXXXXXXX proportion of the total amounts claimed by Mr. C and Mr. D pursuant to section 110.6 of the Act on their previous dispositions of Canco Shares to Mr. A. In determining the adjusted cost base of the other block of XXXXXXXXXX Canco Shares for the purposes of paragraph 84.1(1)(b) of the Act, you have deducted the following amounts:
(a) a XXXXXXXXXX proportion of the total amounts previously claimed by Mr. C and Mr. D pursuant to section 110.6 of the Act on their previous dispositions of Canco Shares to Mr. A; and
(b) a XXXXXXXXXX proportion of previous section 110.6 claims in respect of the Canco Shares that you believe were allocable to the XXXXXXXXXX Canco Shares that Mr. B purchased from Mr. A in paragraph 4 above.
In your letter, you have outlined what appears to be an actual fact situation related to a particular group of taxpayers. The review of such situations is the responsibility of the local Tax Services Office that is responsible for administering the tax affairs of the taxpayers in question. Furthermore, it is the practise of the Canada Revenue Agency not to comment on such situations 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.
Where a taxpayer has acquired shares of a corporation after 1971 that constitute identical properties, each particular share's adjusted cost base that is otherwise determined for the purposes of the Act must be reduced by the total of the amounts determined in respect of the particular share under subparagraphs 84.1(2)(a.1)(i) and (ii) of the Act in order to determine the total adjusted cost base of the shares for the purposes of "B" and "E" in subsection 84.1(1). In this regard, a taxpayer will be required by subparagraph 84.1(2)(a.1)(ii) to reduce the adjusted cost base of a particular share to the extent of any amounts determined after 1984 under subparagraph 40(1)(a)(i) (i.e., post-1984 gains) in respect of previous dispositions of the share (or a share for which the share was substituted) by the taxpayer or by an individual with whom the taxpayer did not deal at arm's length, unless the taxpayer can demonstrate that a lesser amount was claimed under section 110.6 of the Act in respect of the post-1984 gains with respect to the particular share.
Accordingly, if one assumes that a taxpayer holds shares of a corporation that constitute identical properties, and the taxpayer can demonstrate that no amount was claimed under section 110.6 of the Act in respect of a previous disposition of the shares (or shares for which those shares were substituted) by the taxpayer or a person who did not deal at arm's length with the taxpayer, there is no reduction to the adjusted cost base of the shares under subparagraph 84.1(2)(a.1)(ii) to be included in the values of "B" and "E" in subsection 84.1(1). Where the taxpayer can only demonstrate this with respect to a certain portion of the shares held by the taxpayer, there is no reduction to the adjusted cost base of that portion of the shares under subparagraph 84.1(2)(a.1)(ii), but the adjusted cost base of the remainder of the shares held by the taxpayer is reduced in accordance with subparagraph 84.1(2)(a.1)(ii).
The reduction to the adjusted cost base of a share under subparagraph 84.1(2)(a.1)(ii) is made on a share-by-share basis. Consequently, any amount of post-1984 gains determined in respect of a particular share (or lesser amount claimed under section 110.6 of the Act in respect of the post-1984 gains on the share) is not averaged or pro-rated amongst the other shares held by the taxpayer even though the adjusted cost base of the shares otherwise determined is computed with reference to the averaging rules in section 47 of the Act. As you are aware, the Agency has previously stated that where a taxpayer holds shares that are identical properties, and some of those shares have been previously disposed of by the taxpayer (or by an individual who did not deal at arm's length) in circumstances where gains arose from the disposition(s) and amounts were claimed under section 110.6 in respect of the previous disposition(s), the taxpayer may identify the shares in respect of which the deduction was claimed. The designation can be made by means of a written statement included with the taxpayer's return of income. The Agency will consider the designation binding in respect of the future application of subparagraph 84.1(2)(a)(ii).
However, the Agency will not necessarily accept a taxpayer's designation in respect of shares that are identical properties in circumstances where the taxpayer has disposed of shares of that class (or shares for which the shares were substituted) in a previous taxation year, unless designations were filed by the taxpayer with the returns of income for the taxation years in which such dispositions took place identifying the shares in respect of which any previous deduction was claimed under section 110.6 by the taxpayer or by a person who does not deal at arm's length with the taxpayer.
Our comments are provided in accordance with the practice outlined in paragraph 22 of Information Circular IC 70-6R5, dated May 17, 2002.
David Palamar
Manager
Corporate Reorganizations Section II
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs 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, 2006
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, 2006
Email this Content