3 April 1990 Ruling 59371 F - GAAR

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.

April 3, 1990

Dear Sirs:

Re:  The Application of Subsection 245(2) of the Income Tax Act (the "Act")

We are writing in response to your letter of January 4, 1990 wherein you requested our opinion as to whether subsection 245(2) of the Act would be applied to the following hypothetical situation which was outlined in your letter.

Situation

1.     Mr. X is a 67 year old Canadian resident.

2.     In 1988 Mr. X had net income for tax purposes of $300,000 of which $200,000 was dividends from taxable Canadian corporations, $50,000 was interest and $50,000 was pension income.  Taxable Canadian corporation has the meaning assigned by paragraph 89(1)(i) of the Act.

3.     In recognition of the difference in the top rate of tax levied on dividends received by individuals (which is approximately 31%) versus the tax rate levied on dividends received by corporations (which is 25% under Part IV of the Act) and in response to proposed legislation which would claw-back the old age security pension received by taxpayers having annual net income of more than $50,000, Mr. X will transfer his portfolio of investments at fair market value to a newly incorporated company ("Newco"). Newco will satisfy the purchase price by issuing to Mr. X a promissory note having a fair market value not in excess of the adjusted cost base to Mr. X of the transferred property and shares having an aggregate fair market value equal to the amount by which the aggregate fair market value of the transferred property exceeds the fair market value of the promissory note described herein.  Mr. X and Newco will file a joint election pursuant to subsection 85(1) of the Act and within the time referred to in subsection 85(6) of the Act to transfer the investments at an agreed amount equal to the adjusted cost base to Mr. X of the transferred property. Adjusted cost base has the meaning assigned by paragraph 54(a) of the Act.

4.     Mr. X will in future years draw down on the promissory note to provide cash to supplement the $50,000 pension income he receives annually.

Our Comments

The situation outlined in your letter appears to involve actual proposed transactions.  Confirmation as to the tax consequences of actual proposed transactions can only be provided in the context of an advance income tax ruling.  The procedures for requesting an advance income tax ruling are outlined in Information Circular 70-6R dated December 15, 1978 issued by Revenue Canada, Taxation.  Nevertheless, we can offer the following general comments.

It would appear that the primary purpose for the incorporation of Newco and the transfer by Mr. X of his portfolio investments to Newco pursuant to subsection 85(1) of the Act is to obtain a tax benefit which would result in the income produced from the portfolio investments being taxed at a rate lower than that currently levied on Mr. X and to avoid the application of proposed section 180.2 of the Act as set out in Bill C-28 which was passed by the House of Commons on December 20, 1989.  Consequently, such transactions would constitute avoidance transactions within the meaning referred to in subsection 245(3) of the Act.  However, in our view, such transactions would not generally be considered to result in a misuse of the provisions of the Act or an abuse having regard to the provisions of the Act read as a whole.

There is no restriction under subsection 85(1) or any other provision of the Act concerning the transfer of investment property to a corporation as long as the property transferred is eligible property within the meaning assigned by subsection 85(1.1) of the Act.  Furthermore, the Act contains a number of specific provisions which may apply to the transfer of investment property to companies and to the use of such companies to hold investment property.  For example, section 84.1 of the Act will apply to such a transfer if all the conditions referred to in the preamble of subsection 84.1(1) are met.  In addition, the rules under Part IV of the Act and the provisions of section 129 of the Act will apply to corporations receiving income from property.  Some of the above-referenced provisions of the Act are designed to achieve a system of "integration" with the result that approximately the same amount of tax will be levied on the investment income regardless of whether it is received directly by the taxpayer or indirectly through a corporation.  Therefore, it is our view that subsection 245(2) of the Act would not generally be applied to the incorporation of Newco and the transfer by Mr. X to Newco of the investment property under subsection 85(1) of the Act, in and by themselves, by virtue of subsection 245(4) of the Act.

The above comments are our general comments on the subject matter outlined in your letter.  They are not rulings and, in accordance with paragraph 24 of Information Circular 70-6R, are not binding on the Department.  The facts of a particular situation may lead to a different conclusion.  Also in formulating our reply, we have not considered other provisions of the Act which may apply to the situation described in your letter.

Yours truly,

for DirectorReorganizations and Non-Resident DivisionSpecialty Rulings DirectorateLegislative and IntergovernmentalAffairs Branch