5 September 1990 Ministerial Correspondence 901994 F - Prescribed Shares - 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.

September 5, 1990

Dear Sirs:

We are writing in response to your letter dated August 15, 1990 wherein you requested our opinion regarding the application of subsection 110.6(8) of the Income Tax Act (Canada) (the "Act") and section 6205 of the Income Tax Regulations (the "Regulations") to the following situation.

Facts

24(1)

24(1)

You are of the opinion that subsection 6205(2) of the Regulations is intended to apply to deem certain shares to be "prescribed shares" where such shares were issued in an estate freeze situation and the tax policy underlying this objective should also apply to your situation since the rights and restrictions attached to the various classes of shares are equivalent to a normal estate freeze.

It appears that the interpretation you seek relates to specific taxpayers 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 with respect to specific transactions which are contemplated, a written request for an advance income tax ruling can submitted in accordance with the Information Circular. Nevertheless, we can offer the following general comments.

Subsection 110.6(8) of the Act 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 of a corporation.  A prescribed share as defined in section 6205 of the Regulations would be exempt from the application of subsection 110.6(8) of the Act.  24(1) Subsection 6205(2) of the Regulations provides that certain preferred shares acquired as part of an estate freeze may be prescribed shares. 24(1)

We trust our comments will be of assistance.

Yours truly,

for DirectorReorganization and Non-Resident DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch