10 October 2024 APFF Roundtable Q. 12, 2024-1028931C6 - Article 84.1 L.I.R.

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84.1(2)(a.1)(ii)

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This translation was prepared by Tax Interpretations Inc. The CRA did not issue this document in the language in which it now appears, and is not responsible for any errors in its translation that might impact a reader’s understanding of it or the position(s) taken therein. See also the general Disclaimer below.

Principal Issues: 1. What is the relevant moment for assessing the non-arm’s length relationship, for the purpose of the ACB reduction in 84.1(2)(a.1)(ii) I.T.A.? 2. Whether the reduction applies when the capital gains deduction was claimed by a person who was, at the time of the prior disposition, not dealing at arm’s length but who is now dealing at arm’s length? 3. Whether the reduction applies when the capital gains deduction was previously claimed by a non-arm's length person but the shares were subsequently held by an arm's length person

Position: 1. The relevant moments for the non-arm's length determination are the time of acquisition by the taxpayer and the time of a prior disposition for which the capital gains deduction was claimed; 2. The fact that the parties are now dealing at arm’s length is not relevant; 3. The prior claim of the capital gains deduction will not reduce the ACB, provided the shares were acquired by the taxpayer from a person dealing at arm’s length and the intermediate detention by the third party was bona fide.

APFF FEDERAL TAX ROUNDTABLE 10 OCTOBER 2024

2024 APFF CONFERENCE

12. Section 84.1 of the Regulations

Situation 1

Paragraph 84.1(2)(a.1) provides that the ACB is reduced if a CGD has been utilized by a non-arm's length person.

In 2020, Mr. X married the daughter of Mr. Y (Mr. X became Mr. Y's son-in-law).

In 2020, Mr. X acquired shares of the capital stock of PME Inc. from Mr. Y, who claimed the CGD.

In 2022, Mr. X ceased to be related to Mr. Y by virtue of the death of his spouse or the rupture of their marriage.

Questions to CRA

(a) If in 2024, Mr. X transferred his shares of PME Inc. on a section 85 rollover basis to his holding company, would section 84.1 reduce the ACB of his shares of the capital stock of PME Inc.?

(b) Is the determination of the non-arm’s length relationship under section 84.1 to be made at the time of the purchase (in 2020) or at the time that section 84.1 is engaged (in the rollover transaction)?

CRA Response to the questions in Situation 1

Paragraph 84.1(2)(a.1) may apply if a share was acquired by a taxpayer from a person with whom the taxpayer was not dealing at arm's length. The time for determining a non-arm's length relationship referred to in that paragraph is the time at which the shares were acquired by the taxpayer.

If the taxpayer was not dealing at arm's length at that time, subparagraph 84.1(2)(a.1)(ii) could have the effect of reducing the ACB of the shares to the taxpayer, for the purposes of applying section 84.1 to any subsequent disposition. That reduction will occur to the extent that the CGD was claimed in respect of a previous disposition of the share or of a share for which the share was substituted, where such CGD was claimed by the taxpayer or an individual with whom the taxpayer did not deal at arm's length. According to the CRA's longstanding position, the relationship between the parties must be assessed at the time section 110.6 is to be applied.

At the time Mr. X acquired the shares of the capital stock of PME Inc., there was a non-arm's length relationship between Mr. X and Mr. Y, and the CGD was claimed by Mr. Y in respect of that disposition. There was therefore a non-arm's length relationship both at the time referred to in paragraph 84.1(2)(a.1) and at the time referred to in subparagraph 84.1(2)(a.1)(ii). Consequently, for the purposes of applying section 84.1 to the sale to his holding company, the ACB of the shares of the capital stock of PME Inc. held by Mr. X must be reduced by the CGD claimed by Mr. Y.

Situation 2

Mr. X sold his shares to a third party (Mr. C) and he claimed the CGD.

Later, Mr. X's daughter purchased the same shares, but held by Mr. C.

Question to the CRA

Does paragraph 84.1(2)(a.1) have the effect of reducing, for the purposes of section 84.1, the ACB to Mr. X's daughter of her shares of the capital stock of PME Inc. by reason of the CGD claimed by her father on the sale to Mr. C?

CRA Response to Situation 2

We have assumed that Scenario 2 is completely independent of Scenario 1 above and that Mr. X's daughter deals at arm's length with Mr. C. Finally, we have assumed that these transactions were not contemplated in advance and that Mr. C acquired the shares as a bona fide investment.

Insofar as Mr. X's daughter purchased the shares from a person with whom she was dealing at arm's length and under the above assumptions, we are of the view that the ACB of those shares should not be reduced by paragraph 84.1(2)(a.1), for the purposes of section 84.1.

Simon Lemieux
October 10, 2024
2024-102893

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Text of Severed Letter

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.

TABLE RONDE SUR LA FISCALITÉ FÉDÉRALE DU 10 OCTOBRE 2024

APFF - CONGRÈS 2024

12. Article 84.1 L.I.R.

Mise en situation 1

L’alinéa 84.1(2)(a.1) L.I.R. prévoit que le PBR est réduit si une DGC a été utilisée par une personne avec lien de dépendance.

M. X est marié avec la fille de M. Y (X serait le gendre de Y).

En 2020, M. X acquiert les actions de PME Inc. auprès de Y et ce dernier a utilisé sa DGC.

En 2022, M. X n’est plus le gendre de M. Y par suite du décès de sa conjointe (fille de Y) ou par rupture du mariage.

Questions à l’ARC

a) Si en 2024, M. X vend les actions de PME Inc. à sa société de gestion, est-ce l’article 84.1 L.I.R. réduira le PBR des actions de PME Inc. ?

b) Est-ce que le lien de dépendance à l’article 84.1 L.I.R. est déterminé une seule fois au moment de l’achat par X (en 2020) ou au moment où il pourrait être déclenché, soit au roulement en 2024 ?

Réponse de l’ARC aux questions de la mise en situation 1

L’alinéa 84.1(2)(a.1) L.I.R. pourra notamment s’appliquer si une action a été acquise par un contribuable auprès d’une personne avec qui il avait un lien de dépendance. Le moment d’évaluation du lien de dépendance visé à cet alinéa est le moment où les actions ont été acquises par le contribuable.

S’il existait un lien de dépendance à ce moment, le sous-alinéa 84.1(a.1)(ii) pourrait avoir pour conséquence de réduire le PBR des actions pour le contribuable, pour l’application de l’article 84.1 à toute disposition subséquente. Cette réduction aura lieu dans la mesure où la DGC a été demandée relativement à une disposition antérieure de l’action ou d’une action à laquelle l’action a été substituée, lorsqu’une telle DGC a été demandée par le contribuable ou un particulier avec qui le contribuable avait un lien de dépendance. Selon la position de longue date de l’ARC, la relation entre les parties doit être évaluée au moment donnant lieu à l’application de l’article 110.6 L.I.R.

Or au moment où M. X a acquis les actions de PME Inc., il existait un lien de dépendance entre M. X et M. Y et la DGC a été réclamée par M. Y relativement à cette disposition. Il existait donc un lien de dépendance tant au moment visé par l’alinéa 84.1(2)(a.1) L.I.R. qu’au moment visé par le sous-alinéa 84.1(2)(a.1)(ii) L.I.R. Par conséquent, pour l’application de l’article 84.1 L.I.R à la vente en faveur de sa société de gestion, le PBR des actions du capital-actions de PME Inc. détenues par M. X doit être réduit de la DGC réclamée par M. Y.

Mise en situation 2

M. X vend ses actions à un tiers M. C et il réclame sa DGC.

Plus tard, la fille de M. X achète les mêmes actions mais détenues par M. C.

Question à l’ARC

L’alinéa 84.1(2)a.1) L.I.R. a-t-il pour effet de diminuer, pour l’application de l’article 84.1 L.I.R., le PBR des actions détenues par la fille de M. X en raison de la DGC prise par son père lors de la vente à M. C?

Réponse de l’ARC à la mise en situation 2

Nous tenons pour acquis que la mise en situation 2 est totalement indépendante de la mise en situation 1 ci-dessus et que la fille de M. X n’a aucun lien de dépendance avec M. C. Finalement, nous posons l’hypothèse que ces opérations n’étaient aucunement envisagées à l’avance et que M. C a acquis les actions à titre d’investissement véritable.

Dans la mesure où la fille de M. X a acheté les actions d’une personne avec qui elle n’avait pas de lien de dépendance et sous les hypothèses précitées, nous sommes d’avis que le PBR de ces actions ne devrait pas être réduit par l’alinéa 84.1(2)a.1) L.I.R., pour l’application de l’article 84.1 L.I.R.

Simon Lemieux
Le 10 octobre 2024
2024-102893

Summaries

Summary Under

Tax Topics - Income Tax Act - Section 84.1 - Subsection 84.1(2) - Paragraph 84.1(2)(a.1) - Subparagraph 84.1(2)(a.1)(ii)

the testing of a NAL relationship regarding the ACB grind under ss. 84.1(2)(a.1) and 84.1(2)(a.1)(ii) occurs when the shares are acquired, rather than when transferred as described in s. 84.1/ non-application in back-to-back sale

(a)

In 2020, Mr. X married the daughter of Mr. Y and also acquired the shares of PME Inc. from Mr. Y (who claimed the capital gains exemption). In 2022, Mr. X ceased to be related to Mr. Y by virtue of the death of his spouse or the rupture of their marriage.

If in 2024, Mr. X transferred his shares of PME Inc. on a s. 85 rollover basis to his holding company, would s. 84.1 reduce the ACB of his shares of PME Inc., or is the determination of the non-arm’s length relationship under s. 84.1 to be made, not in 2020, but at the time it is engaged (in 2024 in this rollover transaction)? CRA stated:

At the time Mr. X acquired the shares of the capital stock of PME Inc., there was a non-arm's length relationship between Mr. X and Mr. Y, and the CGD was claimed by Mr. Y in respect of that disposition. There was therefore a non-arm's length relationship both at the time referred to in paragraph 84.1(2)(a.1) and at the time referred to in subparagraph 84.1(2)(a.1)(ii). Consequently, for the purposes of applying section 84.1 to the sale to his holding company, the ACB of the shares of the capital stock of PME Inc. held by Mr. X must be reduced by the CGD claimed by Mr. Y.

(b)

Mr. X sold his shares of PME Inc. to a third party (Mr. C) and claimed the CGD. Later, the daughter of Mr. X (who dealt at arm’s length with Mr. C) purchased the same shares from Mr. C. Would s. 84.1(2)(a) apply to reduce, for s. 84.1 purposes, the ACB to the daughter of Mr. X of the shares of PME Inc. by reason of the CGD claimed by her father on the sale to Mr. C? CRA responded:

Insofar as Mr. X's daughter purchased the shares from a person with whom she was dealing at arm's length … the ACB of those shares should not be reduced by paragraph 84.1(2)(a.1), for the purposes of section 84.1.

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10 October 2024 APFF Roundtable Q. 12, 2024-1028931C6 - Article 84.1 L.I.R.

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