20 October 1989 Ruling 74283 F - Benefits Conferred

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.

Subject: Paragraph 85(1)(e.2)

This is in reply to your memorandum (undated) which we received on August 31, 1989 in which you requested our views as to the application of paragraph 85(1)(e.2) to the following situations:

Situation A

An individual or corporation who owns 100% of the outstanding shares of the transferee corporation transfers property having a fair market value in excess of its adjusted cost base on a tax- deferred basis pursuant to subsection 85(1) to the transferee corporation.  The consideration received by the transferor is one preferred share of the transferee having a nominal value which is below the fair market value of the transferred property.

Situation B

All of the outstanding shares of two sister subsidiary corporations are owned by a parent corporation.  One of the subsidiaries transfers property having a fair market value in excess of its adjusted cost base on a tax-deferred basis pursuant to subsection 85(1) to the other subsidiary.  The consideration received by the transferor is one preferred share of the transferee having a nominal value which is below the fair market value of the transferred property.

Our Comments

In the previous version of paragraph 85(1)(e.2) the test was whether any part of the excess could reasonably be regarded as a gift made by the transferor to or for the benefit of any other shareholder of the transferee.  The test in the current version is whether any part of the excess can reasonably be regarded as a benefit that the transferor desired to have conferred on any person related to the transferor.  This latter test is met in both Situation A and Situation B and paragraph 85(1)(e.2) would therefore apply.  In each case it could reasonably be regarded that the value of the transferred property in excess of the consideration paid is a benefit that the transferor desired to have conferred on the transferee, a person related to the transferor.

For a further discussion of the Department's position on this issue we refer you to the theme paper entitled "Demise of the Wingless Butterfly" presented by R.M. Beith at the 1988 Canadian Tax Foundation Conference.  A copy of the theme paper is attached for your reference.

for DirectorReorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch

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