9 February 1990 Internal T.I. 59439 F - Inadequate Consideration - Redemption of Shares

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.

Dear Sirs:

Re:  Paragraph 69(1)(b) and subsection 84(3) of the Income Tax Act (the "Act") and our letter 5-9166 dated December 18, 1989

We are writing in response to your letter of January 18, 1990, which refers to our letter under reference.  Further to our letter, you ask whether the Department would take the position that the fair market value of a share redeemed by a corporation would be equal to the redemption price paid therefor notwithstanding that the fair market value was much greater.  For example, in the situation originally posed by your, and in respect of which, our letter of December 18, 1989 was in reply, the redemption amount actually paid to a shareholder for a common share was $100, whereas its fair market value was $750.  In support of your view, you state that $100 would be a fair market value price to pay where a company buys back its own shares, because the "market" of a company buying its own shares is significantly different from the "market" of a third (arm's length) party buying those shares.

Comments

As indicated on page 2 of our letter of December 18, 1989, we would not take the position that the fair market value of a share redeemed or purchased for cancellation by the issuing corporation would be equal to the redemption or purchase price paid for the share.

The fair market value of a property is "the price that a willing purchaser would pay to a willing seller, each exercising a reasonable judgment", and J. Emile Groulx v. the Minister of National Revenue {67 DTC 5284 at 5288} is but one example where the courts have adopted this view.  Consequently, we affirm our earlier opinion that paragraph 69(1)(b) of the Act would apply to deem a taxpayer to have received proceeds equal to the fair market value of a property in a case where the actual proceeds were less than such value and the taxpayer and the purchaser were not dealing at arm's length with one another.

Yours truly,

for DirectorReorganizations and Non-Resident DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch