9 December 1983 Income Tax Severed Letter 5-5511 - []

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 K.H. Major (613) 995-1787

December 9, 1983

XXXX

Dear

This is in reply to your letter of September 27, 1983 in which you requested our views concerning the interaction of sub- paragraph 95(2)(f)(ii) and subsection 85.1(3) of the Income Tax Act (the Act) in the following circumstances:

(1) A Canadian corporation ("C") acquired 100% of the shares of a U.K. operating company ("UKO") at the end of 1977 when one pound was equivalent to $2.10 Canadian. The acquisition cost was 100,000 pounds or S210,000.

(2) During 1980, the shares of UKO were sold to a new U. K. holding company ("UKH") on a share-for-share exchange covered by subsection 85.1(3) of the Act. There was no non-share consideration issued by UKH and the fair market value of UKO at the time of transfer was in excess of $100,000 pounds. The exchange rate at the time of the transfer was one pound equals $2.80 Canadian.

(3) During 1982, the shares of UKO were sold by UKH to an unrelated purchaser for cash in the amount of 200,000 pounds. The exchange rate at the time was one pound equals to $2.00 Canadian resulting in Canadian dollar equivalent sale proceeds to UKH of $400,000.

(4) At all times between acquisition in 1977 and sale in 1982, C owned directly (or indirectly through UKH) 100% of all the outstanding shares of UKO.

(5) At the time of sale in 1982, the "exempt surplus" of UKO was 50,000 pounds. There was no taxable surplus then on hand.

(6) At the time of sale, the shares of UKO qualified as "excluded property" as defined in paragraph 95(.1)(a.l) of the Act as ail or substantially all of UKO's property was used or held principally for the purpose of gaining or producing income from an active business.

Your concern was with respect to the computation of the capital gain to UKH on the disposition of the UKO shares in 1982 and in particular the appropriate rate of exchange to convert the Canadian dollar adjusted cost base of shares of UKO to U.K. currency to compare against the U.K. currency proceeds of disposition (200,000 pounds).

You presented three alternatives as follows:

(i) the rate of exchange prevailing on the date (1977) when C originally acquired UKO;

(ii) the rate of exchange prevailing on the date (1980) the shares of UKO ware acquired by UKH in a share-for-share exchange pursuant to the provisions of subsection 85.1(3) of the Act; or

(iii) the rate of exchange on the date (1982) of the ultimate sale of shares of UKO by UKH.

It is our opinion that subsection 85.1(3) of the Act provides for a flow-through of historical cost and that this interpretation is consistent with the purpose of subsection 85.1(3) of the Act. Therefore it is our view that alternative (i), not alternative (ii) as you suggested, provides the appropriate rate of exchange at which to convert the Canadian dollar adjusted cost base to U.K. currency.

We trust that this information will be of assistance to you. Yours truly,

for Director Specialty Corporations Rulings Division Corporate Rulings Directorate Legislation Branch