23 December 1986 Income Tax Severed Letter 5-2174 - [Subsection 247(1) of the Income Tax Act]

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.

Revenue Canada Taxation

Head Office

XXXX

D. Webb (613) 957-2119

Attention XXXX

December 23, 1986

Dear Sirs:

Re: Subsection 247(1) of the Income Tax Act

This is in response to your request of September 11, 1986 for an interpretation on the application of subsection 247(1) of the Income Tax Act (the "Act") in the following hypothetical situation.

1. Mr. A owns 100% of the common shares of X Co. which in turn owns 100% of the commons shares of Y Co. The paid-up capital of the shares of X Co. and Y Co. is nominal.

2. X Co. is a holding company and Y Co. is a small business corporation.

3. Prior to the incorporation of X. Co. in 1985, Mr. A owned the shares of Y Co. personally.

4. 70% of these shares we owned prior to V-Day and had a V-Day value of $350,000. The remaining 30% of these shares were acquired in 1975 from an arm's length party for $150,000.

5. In 1985 Mr. A sold his shares of Y Co. to X Co. in exchange for the common shares of X Co. which he now owns. An election was filed pursuant to subsection 85(1) of the Act wherein Mr. A and X. Co. agreed to transfer the shares at an agreed amount equal to Mr. A's adjusted cost base of the shares.

6. Mr. A wishes to sell his X Co. shares to Z Co. (a newly incorporated taxable Canadian corporation) pursuant to subsection 85(1) of the Act. The consideration received on the transfer will be debt with a fair market value of $150,000 and common shares having a nominal paid-up capital.

7. The debt will then be paid.

Although the repayment of the debt from Z Co. to Mr. X would fall within the words of subsection 247(1) of the Act we would ordinarily not seek to apply that provision in the circumstances described above.

The transfer of Mr. A's shares of X Co. to Z Co. as described above, will be subject to the provisions of subsection 84.1(1) of the Act, even though it will not result in a reduction of paid-up capital or a deemed dividend. When an individual disposes of shares to a corporation with which he does not deal at arm's length in a transaction or series of transactions to which section 84.1 of the Act applies, Revenue Canada normally will not apply subsection 247(1) of the Act. On the other hand, Revenue Canada will probably apply subsection 247(1) of the Act to an individual who disposes of shares to another corporation with which he does not deal at arm's length in a manner which circumvents section 84.1 of the Act.

Our response represents our current general opinion on the matter you have raised. It is not a ruling, and therefore not binding on Revenue Canada, Taxation as explained in information Circular 70-6R issued by the Department of National Revenue on December 18, 1978.

Yours truly,

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