25 July 1990 Ministerial Letter 901018 F - Denial of Capital Gains Deduction

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.

July 25, 1990

Dear Sir:

Re:  Subsections 245(2) and 110.6(8) of the Income Tax Act (Canada) (the "Act")

We are writing in response to your letter dated May 29, 1990 in which you requested a technical interpretation on the application of subsections 245(2) and 110.6(8) of the Act to the following situation.

1.     

2.     24(1)

3.     

It appears that the interpretation you seek relates to a specific taxpayer and, therefore, we bring to your attention Information Circular 70-6R dated December 18, 1978 issued by Revenue Canada, Taxation and the related Special Release thereto.  Confirmation with respect to proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling.  If you wish to obtain an advance income tax ruling for a particular taxpayer with respect to specific transactions which are contemplated, a written request for an advance income tax ruling can be submitted in accordance with the Information Circular.  Nevertheless, we can offer the following general comments.

Subsection 110.6(8) is an anti-avoidance rule enacted to prevent the conversion of dividend income into exempt capital gains.  A denial of the capital gains deduction results where a significant part of the capital gain is attributable to the fact that dividends were not paid on a share (other than a prescribed share) of a corporation.  Even though, the preferred shares would not qualify as "prescribed shares" since all of the conditions of paragraph 6205(2)(b) of the Regulations are not met by the transaction, it appears reasonable to attribute the capital gain, in this particular situation, to the common shares which qualified as "prescribed shares" under subsection 6205(1) of the Regulations.  Since the transaction does not appear to result in a conversion of dividend income into capital gains subsection 110.6(8) of the Act should not apply to deny the deduction under subsection 110.6(2.1) of the Act.

It is a question of fact whether or not a tax benefit as defined in subsection 245(1) of the Act would exist in a particular situation.  Having identified a tax benefit, it would be essential to review the transaction or series of transactions to determine whether or not the transaction or series of transactions would constitute an avoidance transaction within the meaning of subsection 245(3) of the Act.  If the two conditions are met then the transaction or series of transactions must result directly or indirectly in a misuse of the provisions of the Act or an abuse having regard to the provisions of the Act read as a whole before the provisions of subsection 245(2) of the Act could apply to the transaction or series of transactions. Based upon the limited facts available in the above situation, we do not feel that the provisions of subsection 245(2) of the Act would apply since there does not appear to be any misuse or abuse of the provisions of the Act.

We would like to draw your attention to the effects of subsection 249(4) of the Act regarding the deemed year end as a result of the change of control.  Depending upon the voting rights attributable to the preference shares, the change of control can result as early as the exchange of the preference shares for the common shares.

The foregoing comments represent our general views with respect to the subject matter of your letter.  The facts of a particular situation may lead to a different conclusion.  In accordance with paragraph 24 of Information Circular 70-6R the comments expressed herein do not constitute an advance income tax ruling and consequently are not binding on the Department.

Yours truly,

for DirectorReorganizations and Non-Resident DivisionRulings DirectorateLegislative and IntergovernmentalAffairs Branch