11 July 1990 Ministerial Letter 900448 F - Exchange of Identical Shares By Spouses

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:

This is in reply to your letter dated April 6, 1990 in which you requested a technical interpretation regarding the application of subsection 73(1) and section 110.6 of the Income Tax Act (Canada) (the "Act") to a series of transactions in which spouses exchange an equal number of shares owned by each of them in a privately owned, company for interest bearing promissory notes equal to the current fair market value of the shares.

The situation outlined in your letter appears to relate to specific proposed transactions.  Confirmation of the tax consequences of specific proposed transactions 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.  We can, however, offer the following general comments with respect to your query.

Shares of a particular class of the,capital stock of a corporation represent "fungible property, in that each such share is identical to every other share of that class.  Accordingly, with respect to the exchange of the identical shares (though represented by different share certificates), it is our position that such a transaction would not constitute a disposition.  Mr. Justice Pratte (for the Court) in Compagnie Immobilière BCN Ltée. 79 DTC 5068 (S.C.C.) at 5073 stated:

     "The verb "to dispose" has a very broad meaning; it is defined as follows in the Oxford English Dictionary (see To dispose of):

     b.   To put or get (anything) off one's hands; to put away,  stow away, put into a settled state or position; to deal with (a thing) definitely; to get rid of; to get done with, settle, finish, In recent use sometimes to do away with, "settle", or demolish (a claim, argument, opponent, etc.); also humorously, to make away with, consume (food).

     The substantive definitions of "disposition of property" and "proceeds of disposition" in s. 20(5)(b) and (c) are a clear indication that the words "disposed of" should be given their broadest possible meaning".

In the circumstances you describe, it is apparent that each spouse would not be disposing of their interest in the company. Without a disposition of property, no deduction would be permitted under subsections 110.6(2.1) or 110.6(3) of the Act.

We would also conclude that since there is no disposition of property then there would be no transfer of property and, therefore, subsection 73(1) of the Act could not apply to the described transaction.

The foregoing comments represent our general views with respect to the subject matter of your letter.

Yours truly,

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