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 R. B. Day (613) 957-2136
October 17, 1985
XXXX
W3 are writing in reply to your letter of September 13, 1985 wherein you requested our views regarding your interpretation of subsection 111(5.1) of the Income Tax Act (the "Act") relative to the following situation.
1. As part of an arm's length purchase of assets, the taxpayer corporation acquired 100% of the issued shares of an operating company ("Newco") for the price specified in the purchase agreement of $200.
2. Newco had non-capital loss carryforwards of approximately $200,000 at the date of acquisition. In addition to this, the undepreciated capital cost of Newco's depreciable assets exceeded the net book value of the depreciable assets by $300,000.
3. Immediately subsequent to the acquisition, the taxpayer corporation had the depreciable assets of Newco independently appraised. This appraisal indicated that the fair market value of the assets was in excess of undepreciated capital cost. In addition to this, subsequent dispositions of the depreciable property support the appraised values in that substantial gains over net book value have been realized.
4. The difference between the share purchase price and the net book value of the assets is not represented by liabilities of the company.
It is your opinion that the fair market value of the property of the prescribed class would not be affected by the overall purchase price of the company because that price has been calculated on a going- concern basis. Fair market value is commonly defined as the highest obtainable cash price in an open and unrestricted market between buyers not compelled to sell. Therefore, you would maintain that the depreciable assets should be valued independent of the overall purchase price of the company and so it is your conclusion that subsection 111(5.1) of the Act does not apply to this situation.
We are unable to confirm your views in this regard because it involves a valuation question.
However, we would expect that where it was not possible to reconcile differences between appraised assets values and the values established as a consequence of an arm's length sale of shares, greater weight would normally be given to the arm's length sale price.
Yours truly,
for Director Corporate Rulings Division Corporate Rulings Directorate Legislation Branch
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