25 July 1990 Ruling 901151 F - Windup - "Bump" not available on Securities

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 Sir:

Re:  Paragraph 88(1)(d) of the Income Tax Act (the "Act")

This letter is in response to your letter dated June 12, 1990 in which you requested a technical interpretation concerning the application of paragraph 88(1)(d) of the Act in the following hypothetical situation.

1.     An individual ("Father") incorporates a holding company in 1980 and invests $100,000 in the shares of such holding company ("Father Co.").

2.        Father Co. purchases marketable securities with the $100,000 in 1980.

3.        In 1990 Father dies, having bequeathed all the issued shares of Father Co. to his son.

4.     At the time of Father's death, the securities held by Father Co. have a fair market value of $1,000,000.  These securities are all the same securities as were originally purchased by Father Co. in 1980.

5.     Soon after the death of Father, his son (who was alive in 1980) incorporates his own holding company ("Son Co.") and transfers the shares of Father Co.  which he had inherited to Son Co.  in consideration of a, promissory note payable on demand in the amount of $1,000,000.

6.     Father Co. is then wound up into Son Co. such that subsection 88(1) of the Act applies.

We agree with your conclusion that paragraph 88(1)(d.2) would, for purposes of paragraphs 88(1)(c) and (d), apply to deem Son Co. to have last acquired control of Father Co. at the time that Father acquired control.  This is because Son Co. would be deemed to have last acquired control under paragraph 88(1)(d.2) at the earlier of the time that the son (the "vendor" with whom Son Co. was not dealing at arm's length) last acquired control (within the meaning of subsection 186(2)) of the subsidiary and the time that the son was deemed by paragraph 88(1)(d.2) to have last acquired control.

The son last acquired control within the meaning of subsection 186(2) when Father acquired control (in 1980) since at that time more than 50% of the voting shares of Father Co. would have belonged to a person (Father) with whom the son did not deal at arm's length.  It is our view that since the son was never deemed by paragraph 88(1)(d.2) to have acquired control (by virtue of the exception in that paragraph for acquisitions of control "by way of bequest or inheritance"'), the earlier time is, in this situation, when Father acquired control.

We are therefore of the opinion that no "bump" would be available under paragraph 88(1)(d) in respect of the marketable securities, since they would not have been owned by Father Co. at the time Son Co. would be deemed to have last acquired control, as required by that paragraph.

It would appear that this result is unintended, and accordingly we will advise the Department of Finance so that it may consider whether an amendment is required.

The above comments reflect our position with respect to the potential application of paragraph 88(1)(d) of the Act and should not be interpreted as implying that any other provision of the Act would or would not apply. For example, depending on the circumstances, section 84.1 could apply.

Yours truly,

for DirectorReorganizations and Non-resident DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch