22 January 1991 Ruling 903591 F - Shares Exchanged for Identical Shares

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:  Request for Technical Interpretation

We are writing in response to your letter of December 6, 1990 wherein you requested our comments on the following hypothetical situation.

1.     Mr. A is a Canadian resident who owns all 100 of the issued and outstanding common shares of Aco which is a Canadian-controlled private corporation and a taxable Canadian corporation as defined in paragraphs 125(7)(b) and 89(1)(i) of the Income Tax Act (Canada) (the "Act"), respectively.

2.     The Aco common shares have a paid-up capital ("PUC") and adjusted cost base ("ACB") of $100 and a fair market value of $1,000,000.  PUC and ACB, as used here and subsequently, have the meanings assigned by paragraphs 89(1)(c) and 54(a) of the Act, respectively.

3.     Each Aco common share is a qualified small business corporation share as defined in subsection 110.6(1) of the Act and is capital property to Mr, A. Capital property has the meaning assigned by paragraph 54(b) of the Act.

4.     Apart from the common shares, Aco has no other authorized share capital.

5.     Aco will obtain articles of amendment whereby two new classes of shares will be created.

(a)       Preference shares which will be non-voting, redeemable and retractable at a price of $1 per share and entitled to a non-cumulative dividend of 8% of the redemption price; and

(b)       Common shares ("new common shares")

6.     Mr. A will exchange his 100 common shares of Aco for 500,000  preference shares and 1,000 new common shares of Aco.  The aggregate PUC of the preference and new common shares of Aco will be equal to that of the 100 common shares of Aco so exchanged.  Mr. A and Aco will jointly elect pursuant to subsection 85(1) of the Act to transfer the Aco common shares at an agreed amount of $500,000.

Comments

Provided there has been a disposition of shares, generally we would expect that the provisions of subsection 85(1) of the Act would apply and any capital gain realized on the disposition of the shares would be eligible for the capital gains deduction pursuant to section 110.6 of the Act.  There may not be a disposition where shares are exchanged for identical shares.

Generally, we would not expect the provisions of subsection 245(2) of the Act to be applicable in the above situation.  However, as stated at the Revenue Canada Round Table at the 1988 Canadian Tax Foundation Conference, at page 53:9, subsection 245(2) of the Act may apply if a proposal to repeal or reduce the capital gain deduction has been introduced by the Minister of Finance prior to the disposition.

The comments expressed are not advance income tax rulings and are not considered binding on the Department, in respect of any taxpayers, in accordance with paragraph 21 of Information Circular 70-6R2 dated September 28, 1990.

Yours truly,

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