25 July 1986 Income Tax Severed Letter 5-1489 - [Disposition of shares on the winding-up of a corporation]

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.

G. Thornley

Jul 25, 1986

Dear Sirs:

Re: Disposition of shares on the winding-up of a corporation

This is in reply to your letter of April 24, 1986 and further to your telephone call of July 15, 1986 requesting technical interpretation of certain provisions of the Income Tax Act as they may apply to a transaction based on the following hypothetical facts:

Mrs. 'A' owns all of the shares of X Corporation.

Paid up capital of shares                           $    1,000

Fair market value of shares on December 31, 1971 $ 300,000

Value of assets to be distributed                   $1,000,000

Mrs. 'A' has elected pursuant to subsection 26(7) of the Income Tax Application Rules with respect to the capital cost to her of capital properties owned on December 31, 1971.

In particular you request our confirmation that any capital loss arising on the application of the above facts would not be disallowed under paragraph 5(4)(a) of the Income Tax Act.

Our comments

We agree that upon winding-up Mrs. A would be deemed to have received a taxable dividend equal to the amount or value of the funds or property distributed minus the paid-up capital of her shares ($1,000,000 - 1,000 = $999,000). We also agree that on the winding-up and as a result of Mrs. A surrendering her shares to the corporation she would be regarded as having disposed of her shares for proceeds of disposition of $1,000 resulting in a capital loss to her of $299,000 being the elected V-day value of her shares of $300,000 minus the proceeds of $1,000. This result is accomplished, as you note, because of the exclusion from "proceeds of disposition" provided by clause 54(h)(x) of the Income Tax Act.

In our view the provisions of subsection 85(4) would only apply in the above hypothetical situation where the corporation is continued and where the other conditions of that subsection, such as those relating to the control of the corporation immediately after the disposition, are met.

We trust you will find our explanation satisfactory.

Yours truly,

ORIGINAL Signed By

Wm. R. McColm

for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch