12 February 1990 Ministerial Correspondence 59474 F - Capital Gains Exemption and Insufficient Dividend Test

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.

February 12, 1990

Dear Sirs:

Re:  Subsection 110.6(8) of the Income Tax Act (the "Act")

We refer to your letter of December 6, 1989, wherein you requested our views on the application of subsection 110.6(8) of the Act and subsection 6205(2) of the Income Tax Regulations ("ITR") to the following hypothetical situation.

The shareholders of a Canadian-controlled private corporation ("Famco") wish to separate certain of its business assets from land and a building that are held by Famco.  The shareholders of Famco consist of a father (the "Father") and individuals who are related to the Father pursuant to subsections 251(2) and 251(6) of the Act, which individuals are hereinafter referred to as "the relatives". Canadian-controlled private corporation ("CCPC") has the meaning assigned by paragraph 125(7)(b) of the Act.

The issued share capital of Famco consists only of common shares, the majority of which are held by the Father.  The remaining common shares are held by the relatives.

The relatives incorporate a new corporation ("Newco"), that will also be a CCPC.  The authorized share capital of Newco consists of common shares and non-voting redeemable and retractable preference shares.  The relatives subscribe for common shares of Newco for nominal consideration.  The common shares of Newco are prescribed shares within the meaning of paragraph 6205(1)(a) of the ITR.

Famco will then transfer certain of its business assets (excluding the land and the building) to Newco pursuant to subsection 85(1) of the Act.  As sole consideration, Newco issues its preference shares to Famco having a redemption amount equal to the fair market value of the assets transferred to Newco and a aggregate paid-up capital equal to the aggregate cost amount of the assets transferred.  Famco will hold the Newco preference shares indefinitely.  Cost amount has the meaning assigned under subsection 248(1) of the Act.

You state that the main purpose of the above described transactions is to permit any increase in the value of the property transferred by Famco to Newco to accrue to the common shares of Newco.

It is your understanding that the preference shares of Newco will be prescribed shares within the meaning paragraph 6205(2)(a) of the ITR.

Comments

Your request appears to relate to a specific proposed transaction.  Confirmation of the tax consequences of a specific proposed transaction will only be provided in response to a request for an advance income tax ruling.  The procedures for requesting an advance ruling are set out in Information Circular 70-6R.  Although we are unable to provide any opinion to response to the specific transactions described in your letter, we do provide the following general observations.

Provided that the main purpose of the arrangement referred to above is to permit any increase in the value of the property transferred to Newco to accrue to the common shares of Newco, we would agree that the preference shares of Newco would be prescribed shares within the meaning of paragraph 6205(2)(a) of the ITR.

We would also point out that any subsection 84(3) dividend arising from the redemption of the Newco preference shares would, subject to the "excepting" provisions of paragraph 55(3)(a) of the Act, subject to the provisions of subsection 55(2) of the Act.  However, paragraph 55(3)(a) of the Act would not apply if the dividend was part of a series of transactions or events, within the extended meaning of this term as set out in subsection 248(10) of the Act, which would result in either one of the two events described in subparagraphs 55(3)(a)(i) or (ii) of the Act.

As stated in paragraph 24 of Information Circular 70-6R dated December 18, 1978, the opinions expressed in this letter are not rulings and are consequently not binding on the Department.

Yours truly

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