31 October 1986 Income Tax Severed Letter 5-2061 - [Transfer of Shares of a Small Business 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.

XXXX

October 31, 1986

T.B. Kuss (613) 957-2120

Dear Sirs:

Re: Transfer of Shares of a Small Business Corporation

This is in response to your letter of August 13 regarding the above-referenced subject. You have requested our opinion whether the deferral provided for in subsection 73(5) of the Act will apply when the shares are transferred to a trust, a beneficiary of which is a minor child. You have also requested our opinion whether an election under subsection 39(4) would be adequate to ensure capital treatment where shares acquired by a child pursuant to subsection 73(5) are disposed of after a short holding period.

Regarding your first question, the Department's position is published in paragraph 12 of Interpretation Bulletin IT-486 dated April 26, 1982. There are four provisos that must be met and rather than repeating them here we will just refer you to the above bulletin.

Regarding your second question it is our opinion that, in these circumstances, a subsection 39(4) election would not be available to the child. The subsection 39(4) election deals with dispositions of "Canadian securities." Canadian security is defined in subsection 39(6) and means "... a security (other than a prescribed security)...." Regulation 6200 deals with prescribed securities. Pursuant to subparagraph 6200(c)(iii), for the purposes of subsection 39(6) of the Act, a prescribed security includes, with respect to the taxpayer referred to in subsection 39(4) of the Act, a security that is a share that was acquired by that taxpayer (the child) in a transaction in which that taxpayer was not dealing at arm's length. It is our opinion that by virtue of the relationship between the child and the taxpayer transferring the shares, these shares would be considered prescribed securities and the subsection 39(4) election would not be available to the child.

The Department has taken the position however, that, where a person (the "vendor") has acquired property from another person on a tax-deferred basis with the intention to sell it soon afterwards on a taxable basis, the short holding period and intention to sell do not, in and by themselves, preclude capital gain treatment. In your circumstances though, if it could be shown that the child had agreed before the transactions to turn his or her proceeds, less their tax liability, over to the parent, it may be argued that the child was only acting as agent for the parent.

We hope these comments are of assistance to you.

Yours truly,

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