21 September 1990 Ruling 900203 F - Exchange of Shares in the Course of Corporate Reorganization

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: Subsection 7(1.5) of the Income Tax Act

This is further to our letter to you of May 28, 1990 concerning the interpretation of subsection 7(1.5) of the Act in the following situation.

X, a Canadian resident individual, is employed by a Canadian-controlled private corporation (CCPC). X acquires shares of another CCPC, A Co., that does not deal at arm's length with his employer in circumstances such that subsection 7(1.1) of the Act applies.

In the course of reorganization, X exchanges the shares of A Co. for shares in B Co. to which subsection 85.1(1) of the Act applies to the exchange.

B Co. and another corporation subsequently amalgamate to form Amalco in an amalgamation to which section 87 of the Act applies. X disposes of his shares of B Co. and acquires shares in Amalco. Subsection 87(4) of the Act applies to the disposition.

You asked whether subsection 7(1.5) of the Act would apply to the exchange by X of the shares of B Co. for shares of Amalco on the amalgamation. It was your concern that although subsection 7(1.5) of the Act applies on the exchange of the shares of A Co. for the shares of B Co., the rules in paragraphs (a) to (d) thereof are only applicable for the purposes of subsection 7(1.1) and paragraph 110(1)(d.1) of the Act and not for the purposes of subsection 7(1.5) of the Act.

It was your view that, from a policy perspective, subsection 7(1.5) of the Act should apply to a series of exchanges within subsections 85.1(1) or 87(4) of the Act since there is no possibility of "cashing-out" by the employee.

In our previous letter, we advised you that. in the above situation, subsection 7(1.5) of the Act would not apply to the exchange by X of the shares of B Co. for the shares of Amalco as a result of the amalgamation.

We have now had an opportunity to discuss this matter further and would ask that you disregard the opinion expressed in our letter of May 28, 1990. In our view, the rules in paragraphs 7(1.5)(a) to (d) would apply for the first reorganization as well as for any future ones, with the result that, on the exchange by X of the shares of B Co. for the shares of Amalco in the above situation, subsection 7(1.5) would be applicable.

We regret any inconvenience caused to you by our previous letter.

Yours truly,

for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch