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.
94,081 DMR J.C. Clark (613) 995-1178
May 22, 1985
Dear Sirs:
Re: Paragraphs 85(1)(e.2) and 15(1)(b) of the Income Tax Act (the "Act")
This is in reply to your letter of March 12, 1985 in which you requested our opinion on the application of paragraph 85(1)(e.2) of the Act.
You described a situation in which an individual owned all of the issued shares of Holdco, which in turn owed all of the issued shares of Opco. Opco owns an asset with a fair market value of $1,000 and an adjusted cost base of $800. Opco sells the asset to Holdco and the parties elect in respect of the sale pursuant to subsection 85(1) of the Act. Opco's consideration is a note for $800 and a preference share redeemable and retractable for $1.
In our opinion, paragraph 15(1)(b) of the Act would apply to include an amount in Holdco's income as property has been appropriated from Opco for the benefit of Holdco to the extent of the excess of the fair market value of the asset transferred over the fair market value of the consideration received by Opco. Paragraph 85(1)(e.2) of the Act also could apply in this situation because it is reasonable to regard the excess described in paragraph 85(1)(e.2) as a gift which Opco desired to have conferred on the individual shareholder.
Yours truly,
for Director General Corporate Rulings Director Legislation Branch
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