4 April 1990 Ministerial Letter 90M04418 F - Buy-sell Agreement - Transfer to Spouse

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.

24(1)

APRIL 4, 1990

NOTES FOR USE BY BRYAN DATH RE. QUESTIONS SUBMITTED FOR DISCUSSION

OTHER PARTICIPANTS, PAUL LAILEY  DEPT OF FINANCE

19(1)

FACT SITUATION 1

(A)       IN MARCH, 1988, A STARTED UP A BUSINESS IN A BUILDING WHICH HE BOUGHT FOR THAT PURPOSE.

(B)       AS IT APPEARED THAT THE BUSINESS WOULD BE SUCCESSFUL AT THE OUTSET, HE DECIDED THAT HIS TWO YOUNGER BROTHER, B AND C, WOULD HELP HIM TO RUN THE BUSINESS.

(C)       IN AUGUST, 1988 A, B, AND C TRANSFERRED THE BUSINESS, OTHER THAN THE BUILDING WHICH WAS STILL OWNED BY A, INTO X CO, A NEW CORPORATION.  A OWNED 60% OF THE SHARES AND EACH OF B AND C OWNED 20%.

(D)       THE THREE BROTHERS ENTERED INTO A BUY-SELL AGREEMENT UNDER WHICH THE SURVIVORS HAD THE OPTION TO BUY THE DECEASED'S SHARES AND THE DECEASED'S WIDOW HAD THE OPTION TO "PUT" HIS SHARES TO THE SURVIVORS.  THEY ARRANGED FOR X CO. TO PURCHASE INSURANCE SO THAT FUNDS WOULD BE AVAILABLE FOR THE PURCHASE OF THE DECEASED'S SHARES.

(E)       IN JULY, 1989, A WAS DIAGNOSED AS SUFFERING FROM A TERMINAL ILLNESS AND IN JULY OF 1990, HE DIED.  UNDER A'S WILL ALL OF HIS ASSETS PASSED TO HIS WIDOW.

QUESTION 1

THE NORMAL RULE IS THAT TO QUALIFY FOR THE $400,000 EXEMPTION IN RESPECT OF SHARES THEY CANNOT HAVE BEEN OWNED BY AN UNRELATED PERSON WITHIN THE PREVIOUS 24 MONTHS.  NEW SHARES ISSUED BY A CORPORATION ARE DEEMED TO HAVE BEEN OWNED BY AN UNRELATED PERSON UNLESS THEY WERE ISSUED IN EXCHANGE FOR SUBSTANTIALLY ALL OF THE ASSETS USED IN AN ACTIVE BUSINESS. BY RETAINING THE BUILDING IN HIS OWN NAME HAS A DENIED HIMSELF THE PROTECTION OF THIS EXCLUSION?

RESPONSE

IF THE BUILDING WAS NOT A PARTNERSHIP PROPERTY THEN APPARENTLY SUBSTANTIALLY ALL OF THE ASSETS USED IN THE PARTNERSHIP BUSINESS WOULD BE TRANSFERRED TO THE NEW CORP AND A HAS NOT DENIED HIMSELF THE PROTECTION OF THE EXCLUSION.

IN THE ABOVE SITUATION, IT APPEARS THAT A PARTNERSHIP WAS CARRIED ON BY A, B, AND C AND THAT THE BUILDING WAS EITHER RENTED TO THE PARTNERSHIP OR USED ON A RENT-FREE BASIS BY THE PARTNERSHIP. IN OTHER WORDS, THE BUILDING WAS NOT PARTNERSHIP PROPERTY OR AN ASSET USED IN AN ACTIVE BUSINESS. IN THESE CIRCUMSTANCES, IT IS THE DEPARTMENT'S VIEW THAT THE ISSUED SHARES WOULD NOT BE DEEMED TO HAVE BEEN OWNED BY AN UNRELATED PERSON BECAUSE THE SHARES OF THE CORPORATION WERE ISSUED IN EXCHANGE FOR SUBSTANTIALLY ALL OF THE ASSETS USED IN THE PARTNERSHIPS ACTIVE BUSINESS.

QUESTION 3

OUR INTERPRETATION OF QUESTION AND RESPONSE PART OF THE THIRD QUESTION CONCERNS WHETHER THE X CO. SHARES HAVE BEEN "VESTED INDEFEASIBLY" IN MRS. A FOR THE PURPOSES OF THE SUBSECTION 70(6) IN VIEW OF THE BUY-SELL AGREEMENT.

IT DEPENDS STEER THE BUY SELL IS COMPULSORY IF THE ESTATE MUST SELL THEN THERE IS NO INDEFEASIBLE VESTING AS PER PARKES. IF THE AGREEMENT IS NOT BINDING ON THE ESTATE AS IN VAN SON THEN INDEFEASIBLE VESTING CAN TAKE PLACE

IN RELATION TO THE "VESTED INDEFEASIBLY" REQUIREMENT, IT APPEARS THAT THE TERMS OF THE BUY-SELL MERELY GIVES B AND C THE OPTION TO ACQUIRE THE SHARES WITH THE RESULT THAT THE BUY-SELL AGREEMENT MAY OR MAY NOT BE EXERCISED.  IN THESE CIRCUMSTANCES IT IS THE DEPARTMENT'S VIEW THAT THE BUY-SELL AGREEMENT WOULD NOT PREVENT THE X CO. SHARES FROM BEING VESTED INDEFEASIBLY IN THE SPOUSE.  HOWEVER, IF THE TERMS OF THE BUY-SELL AGREEMENT MADE IT COMPULSORY FOR THE EXECUTOR OF A'S ESTATE TO SELL AND A AND C TO BUY THE X CO.  SHARES, THE DEPARTMENT'S VIEW IS THAT THE SHARES WOULD NOT VEST INDEFEASIBLY IN THE SPOUSE AND NO ROLLOVER WOULD BE AVAILABLE.

I WOULD ALSO ADD THAT MY COMMENTS ARE CONSISTENT WITH THE PARKS ESTATES DECISION (86 DTC 1214) WHICH DEALT WITH A COMPULSORY SALE OF SHARES. A RECENT CASE IN THE FEDERAL COURT TRIAL DIVISION VAN SON ESTATE HELD THAT AS THERE WAS NO ENFORCEABLE OBLIGATION ON THE PART OF THE ESTATE TO SELL THE SHARES THE SHARES VESTED.

THE SECOND PART OF THE THIRD QUESTION CONCERNS WHETHER A COULD USE THE $400,000 CAPITAL GAINS EXEMPTION IN THE YEAR OF DEATH ASSUMING THE ROLLOVER PROVISIONS OF SUBSECTION 70(6) DON'T APPLY.  IN RELATION TO THIS POINT, THE ISSUE IS WHETHER "ALL OR SUBSTANTIALLY ALL" OF X CO.'S ASSETS WERE USED IN AN ACTIVE BUSINESS AT THE TIME OF THE DEEMED DISPOSITION UNDER SUBSECTION 70(5) IN VIEW OF THE LIFE INSURANCE POLICY.

INSURANCE POLICY WILL NOT BE AN ACTIVE BUSINESS ASSET AND WILL BE INCLUDED IN THE CORP'S ASSETS AT ITS FAIR MARKET VALVE WHICH IN THIS CASE WILL BE CLOSE TO ITS FACE VALUE.

AS IT APPEARS THAT THE LIFE INSURANCE PROCEEDS WILL BE PAID OUT AS DIVIDEND TO FUND THE BUY-SELL AGREEMENT, IT IS THE DEPARTMENT'S VIEW THAT THE  LIFE INSURANCE POLICY WOULD NOT BE CONSIDERED TO BE AN ASSET USED IN AN ACTIVE BUSINESS. ACCORDINGLY, FAIR MARKET VALUE OF THE LIFE INSURANCE POLICY' ASSUMING IT REPRESENTS MORE THAN 10% OF THE FAIR MARKET VALUE OF X CO.'S ASSETS AT THE TIME OF THE DEEMED DISPOSITION, WOULD RESULT IN THE "ALL OR SUBSTANTIALLY ALL" REQUIREMENT NOT BEING SATISFIED. AS A FURTHER COMMENT, IT WOULD APPEAR THAT IN VIEW OF MR. A'S STATE OF HEALTH PRIOR TO DEATH, THE INSURANCE POLICY WOULD BE VALUED AS AN AMOUNT CLOSE TO ITS VALUE AT MATURITY.

QUESTION 4

ASSUMING THAT MRS. A ACQUIRES THE X CO. SHARES UNDER THE ROLLOVER PROVISIONS OF SUBSECTION 70(6). THE ISSUE IS WHETHER MRS.  A, IN VIEW OF THE LIFE INSURANCE POLICY, CAN USE THE $400,000 CAPITAL GAINS EXEMPTION WHEN SHE SELLS THE X CO. SHARES TO B AND  C.

RESPONSE

OBVIOUSLY THE PROCEEDS OF THE INSURANCE WOULD NO LONGER BE IN THE CORP TO PUT IT OFFSIDE HOWEVER THEY WOULD HAVE BEEN DURING THE LAST 24 MONTHS AND THEREFORE HAVE THE POTENTIAL OF PUTTING THE CORP OFFSIDE.

THE DEPARTMENT'S VIEW ON THIS ISSUE IS THAT THE LIFE INSURANCE PROCEEDS WERE RECEIVED AND PAID OUT AS A DIVIDEND PRIOR TO THE SALE, THEY WOULD HAVE NO EFFECT ON DETERMINING WHETHER X CO. WAS A SMALL BUSINESS CORPORATION AT THE TIME OF SALE.

HOWEVER, IT IS POSSIBLE THAT X CO., AS A CONSEQUENCE OF HAVING RECEIVED THE PROCEEDS PRIOR TO THE SALE, WOULD FAIL TO HAVE USED MORE THAN 50% OF ITS ASSETS IN AN ACTIVE BUSINESS THROUGHOUT THE SPECIFIED TIME PERIOD PRIOR TO THE SALE. IF THIS WERE TO BE THE CASE, IT WOULD NOT BE POSSIBLE FOR A SHARE OF X CO. TO BE A QUALIFYING SMALL BUSINESS CORPORATION SHARE FOR AT LEAST TWO YEARS FROM THE TIME X CO. AGAIN COMMENCED TO MEET THAT 50% TEST.

QUESTION 5

THE INITIAL SCENARIO HAS BEEN MODIFIED AS THAT EACH OF A, B, AND C USED A HOLDING CORPORATION TO HOLD HIS SHARES OF X CO. AND THE INSURANCE ON THE LIVES OF THE OTHERS. THE QUESTION THEN BECOMES WHETHER A SHARE IN A'S COMPANY (ACO) IS A QUALIFIED SMALL BUSINESS CORPORATION SHARE.

RESPONSE

INSURANCE PROCEEDS WOULD BE IN OTHER CORPS THEREFORE NO PROBLEM THERE. INSURANCE POLICIES HELD BY A CO. WOULD BE OFFSIDE ASSETS

IN THIS TYPE OF SITUATION IT IS THE DEPARTMENT'S VIEW THAT THE INSURANCE POLICIES ON A'S LIFE AND THE PROCEEDS THEREOF WOULD NOT BE A FACTOR IN DETERMINING WHETHER ACO WAS A SMALL BUSINESS CORPORATION AT THE TIME OF SALE BY MRS. A BECAUSE THOSE ASSETS WOULD BELONG TO THE HOLDING COMPANIES OF B AND C.

HOWEVER, THE POLICIES ON THE LIVES OF B AND C HELD BY ACO WOULD HAVE TO BE VALUED, AS THESE WOULD NOT BE ASSETS USED IN AN ACTIVE BUSINESS.  THE USUAL TESTS WOULD HAVE TO BE APPLIED TO DETERMINE WHETHER THE SHARES OF ACO WERE QUALIFIED SMALL BUSINESS CORPORATION SHARES AT THE RELEVANT TIME.

QUESTION 6

COULD BOTH MR. A AND MRS. A UTILIZE THE CAPITAL GAINS EXEMPTION UTILIZING SUBSECTION 70(6.2). UNDER THIS PROVISION, AN ELECTION CAN BE MADE IN RESPECT OF ANY PROPERTY SO THAT THE PROVISIONS OF SUBSECTION 70(5) APPLY RATHER THAN THE ROLLOVER PROVISIONS OF SUBSECTION 70(6).

RESPONSE

EACH SHARE IS CONSIDERED TO BE A SEPARATE PROPERTY SO IT IS POSSIBLE TO ELECT ON SOME AND NOT OTHERS AND DOUBLE UP THE EXEMPTION.

IN RELATION TO THE PROVISIONS OF SUBSECTIONS 70(6) AND 70(6.2), IT IS THE DEPARTMENT'S VIEW THAT MRS. A, AS A'S EXECUTOR, COULD ELECT OUT OF THE AUTOMATIC INTER-SPOUSAL ROLLOVER PROVISIONS PURSUANT TO SUBSECTION 70(6.2) IN RESPECT OF SOME OF MR. A'S X CO.  SHARES AND NOT OTHERS AS EACH SHARE IS CONSIDERED TO BE A SEPARATE PROPERTY.  THE EFFECT OF ACHIEVING THIS RESULT IS THAT IT MAY BE POSSIBLE FOR BOTH MR. A AND MRS. A TO UTILIZE THE $400,000 CAPITAL GAINS EXEMPTION.

FACT SITUATION II

SAME AS 1 EXCEPT THAT

1)        A HAD TRANSFERRED THE BUILDING TO X CO AT THE BEGINNING BUT

11)       NO INSURANCE OR BUY-SELL AGREEMENT WAS IN PLACE AT  HIS DEATH

B, C, AND MRS A AGREE THAT THEY WOULD LIKE TO DISTRIBUTE THE BUILDING TO MRS A IN SATISFACTION OF THE 60% INTEREST IN X CO WHICH SHE INHERITED FROM A.  THE BUILDING REPRESENTS 60% OF X CO'S TOTAL ASSETS.

QUESTION 1

MAY THE BUILDING BE BUTTERFLIED TO A NEW CORP CONTROLLED BY MRS A THE WIDOW?

OUR INTERPRETATION OF THE QUESTION

-     IF THE BUILDING IS TRANSFERRED BY WAY OF A SINGLE WINGED BUTTERFLY OF X CO TO A NEW HOLDING CO A CO TO WHICH MRS A HAS TRANSFERRED HER SHARES OF X CO WILL THE DIVIDENDS DEEMED TO BE PAID ON THE CROSS REDEMPTION OF SHARES OF X CO AND A CO BE EXEMPT FROM THE APPLICATION OF 55(2) BY VIRTUE OF 55(3)(B)

RESPONSE

YES ASSUMING TEAT THE BUILDING AND ALL OF THE OTHER PROPERTY OF CO CONSTITUTED BUSINESS PROPERTY FOR THE PURPOSES OF 55(3)(B)

QUESTION 2

ASSUMING ANSWER TO QUESTION 1 IS YES BECAUSE THE BUILDING AND OTHER ASSETS OF X CO WERE ALL BUSINESS ASSETS WOULD THE ANSWER BE DIFFERENT IF TWO MONTHS BEFORE A DIED X CO MOVED TO RENTAL PREMISES AND LEASED THE BUILDING TO AN ARMS LENGTH TENANT?  OR WOULD THE BUTTERFLY RULES NOT APPLY HERE BECAUSE:

-     THE BUILDING IS NOW AN INVESTMENT PROPERTY AND A PRO RATA SHARE IS NOT BEING DISTRIBUTED TO EACH SHAREHOLDER AS REQUIRED TO MEET THE EXCLUSION UNDER 55(3)(B) AND

-     THE PARTIES CANNOT RELY ON THE NON ARMS LENGTH EXEMPTION IN 55(3)(A) SINCE THE BROTHERS ARE DEEMED TO DEAL WITH EACH OTHER AT ARMS LENGTH FOR PURPOSES OF THE BUTTERFLY  RULES AND MRS A CEASES TO BE RELATED ONCE A DIES

RESPONSE

YES THE ANSWER WOULD BE DIFFERENT FOR THE ABOVE REASONS

AS THE SERIES OF TRANSACTIONS THAT INCLUDES THE DIVIDENDS WOULD RESULT IN AN INCREASE IN THE PERCENTAGE INTEREST IN X CO BY B AND C WHO WOULD BE DEEMED TO DEAL AT ARMS LENGTH BY 55(5)(E) THE DIVIDENDS WOULD NOT QUALIFY FOR THE EXEMPTION IN 55(3)(A)

QUESTION 3

OUR INTERPRETATION OF THE QUESTION

WOULD THE RESPONSE TO QUESTION 2 BE DIFFERENT IF A'S SHARES OF X CO WERE BEQUEATHED TO A SPOUSAL TRUST FOR MRS A WITH A'S FATHER APPOINTED AS SOLE TRUSTEE

RESPONSE

YES THE ANSWER WOULD BE DIFFERENT

A'S FATHER IS RELATED TO A'S BROTHERS AND SUBJECT TO THE TERMS OF THE TRUST CONTROLS BOTH A CO AND X CO

THEREFORE (SUBJECT TO 55(4) )EACH OF THE BROTHERS WOULD BE DEEMED NOT TO DEAL AT ARMS LENGTH WITH A CO AND X CO

THUS DIVIDENDS WOULD QUALIFY FOR THE EXEMPTION  IN 55(3)(A)

55(4) COULD BE APPLIED IF IT WAS CONSIDERED THAT THE PRINCIPAL PURPOSE OF ESTABLISHING THE SPOUSAL TRUST WITH A'S FATHER AS THE TRUSTEE WAS TO CAUSE THE BROTHERS TO BE RELATED AND NOT DEAL AT ARMS LENGTH. 55(4) DEEMS THEM TO DEAL AT ARMS LENGTH. FUTURE EVENTS SUCH AS THE DISTRIBUTION OF THE TRUST CAPITAL TO MRS. A COULD BE AN INDICATION ON INTENT.

CAUTION

THE EXEMPTION IS AVAILABLE PROVIDED THAT THE BUTTERFLY TRANSACTIONS THAT RESULT IN THE DEEMED DIVIDENDS ARE NOT PART OF A LARGER SERIES OF TRANSACTIONS THAT RESULTS IN THE DISPOSITION OF PROPERTY TO, OR AN INCREASE IN INTEREST IN ANY CORPORATION BY, A THIRD PARTY WHO DEALS AT ARMS LENGTH WITH A CO OR X CO

QUESTION 4

OUR INTERPRETATION OF THE QUESTION

WOULD ANY FUTURE SALE OF THE SHARES OR ASSETS OF A CO TO AN ARMS LENGTH THIRD PARTY BE CONSIDERED TO BE PART OF A SERIES OF TRANSACTIONS THAT INCLUDED THE DEEMED DIVIDENDS OR WOULD SUCH A FUTURE SALE HAVE TO BE SPECIFICALLY CONTEMPLATED AT THE TIME OF SUCH DIVIDENDS IN ORDER TO BE CONSIDERED TO BE PART OF THE SERIES

RESPONSE

248(10) DEEMS A SERIES OF TRANSACTIONS TO INCLUDE TRANSACTIONS OR EVENTS COMPLETED IN CONTEMPLATION OF THE SERIES.

OUR VIEW IS THAT A PRELIMINARY TRANSACTION WILL FORM PART OF A SERIES IF AT THE TIME THE PRELIMINARY TRANSACTION IS CARRIED OUT THE TAXPAYER INTENDS TO IMPLEMENT SUBSEQUENT TRANSACTIONS AND THIS IN FACT HAPPENS

THE FACT THAT THE TAXPAYER MAY NOT HAVE DETERMINED ALL OF THE IMPORTANT ELEMENTS; FOR EXAMPLE IDENTIFIED A THIRD PARTY, OF THE SUBSEQUENT TRANSACTION WOULD NOT PREVENT THE PRELIMINARY TRANSACTION FROM BEING PART OF A SERIES

A'S FATHER'S INTENTION IS THE KEY FACTOR

2.  SALARIES, BONUSES, USE OF CORPORATE ASSETS

QUESTION 1

SIZE OF BONUS A SOLE OWNER MANAGER MAY PAY HIMSELF

RESPONSE

-      THE REASONABLENESS TEST OF SEC 67 COULD HAVE APPLICATION TO ANY EXPENSE

-     GENERALLY WE WOULD NOT SEEK TO APPLY SEC 67 IN RESPECT OF A BONUS TO AN OWNER/EMPLOYEE WHERE HE IS ACTIVE IN THE BUSINESS

QUESTION 2

GUIDELINES FOR REASONABLENESS OF SALARIES PAID TO FAMILY MEMBERS WHO ARE NOT ACTIVE IN THE BUSINESS FOR EXAMPLE SPOUSES WHO COME IN ONCE A WEEK TO SIGN CHEQUES OR CHILDREN WHO HAVE SUMMER JOBS

RESPONSE

-     WE WOULD CONSIDER THAT AN AMOUNT THAT WOULD BE PAID IN AN ARMS LENGTH TRANSACTION WOULD BE REASONABLE

-     REFER TO MADUKE CASE DTC 89 DTC 5458 FC TD

QUESTION 3

VALUATION OF BENEFIT FOR CORPORATE OWNED PROPERTY USED BY SHAREHOLDER. WHERE THE SHAREHOLDER CONTRIBUTES THE FUNDS TO PURCHASE THE ASSET THAT IS USED COULD ONE LOOK AT THE FINANCIAL ADVANTAGE THAT IS GAINED BY THE SHAREHOLDER AS THE BENEFIT RATHER THAN USING FAIR MARKET VALUE OR A RETURN ON INVESTMENT VALUATION

RESPONSE

-     THERE ARE A NUMBER OF CASES ON THIS ISSUE, YOUNGMAN AND WOODS BEING THE MOST RECENT. THESE HELD THAT THERE IS A FMV BENEFIT OR A RETURN ON INVESTMENT BENEFIT.

-     THE U.S. CONDO POSITION WAS TAKEN IN 1980 IN RESPECT OF A SPECIFIC RULING AND WAS NOT MEANT TO BE ANY BROADER. IT IS ANTICIPATED THAT THE CANADA U.S. TAX AGREEMENT WILL BE AMENDED SOON TO RECOGNIZE CERTAIN TAXES PAID IN THE OTHER JURISDICTION.  WHEN THIS HAPPENS THERE WILL NO LONGER BE A NEED FOR OUR ADMINISTRATIVE POSITION.

-     OUR VIEW IS THAT THE SEPARATE CORPORATE ENTITY MUST BE RECOGNIZED AND THE VALUE OF A BENEFIT IS NOT RELATED TO HOW MUCH YOU HAVE INVESTED IN THE COMPANY. WHERE THE CORP IS OTHER THAN A SOLE PURPOSE CORP IT IS LIKELY DIFFICULT TO TRACK FUNDS.

-     THIS QUESTION HAS BEEN RAISED IN ANOTHER FORUM AND THE DEPARTMENT HAS UNDERTAKEN TO REVIEW THE ISSUE. ANY CHANGE IN POSITION WILL LIKELY BE ANNOUNCED IN AN IT BULLETIN

QUESTION 4

RE U.S. PERSONAL USE PROPERTY ADMINISTRATIVE POSITION. AT 89 CTF REVENUE SAID THAT THERE WAS NO CHANGE IN POSITION HOWEVER WE UNDERSTAND THAT THE POSITION WILL NOT APPLY IF THE PROPERTY IS ROLLED TO THE CORP.

-     THIS ADMINISTRATIVE POSITION WAS TAKEN IN A PARTICULAR CASE AND INVOLVED THE PURCHASE OF A PROPERTY AT FAIR MARKET VALUE

-     THE DEPARTMENT HAS NEVER CONSIDERED IT APPROPRIATE IN A SECTION 85 SITUATION

-     THE EXAMPLE OF PROTECTING THE PRINCIPAL RESIDENCE EXEMPTION IS ENOUGH REASON TO MAKE THIS EXTENSION OFFENSIVE

PENSION FUND INVESTMENTS

QUESTION

IS EITHER THE DEPARTMENT OF FINANCE OR REVENUE CANADA AWARE OF ANY SITUATION IN WHICH A SMALL BUSINESS HAS ATTEMPTED TO ACCESS FUNDS IN RRSP'S OR PENSION PLANS BY WAY OF SMALL BUSINESS INVESTMENT CORPS, SMALL BUSINESS INVESTMENT TRUSTS, OR SMALL BUSINESS INVESTMENT LIMITED PARTNERSHIPS? IS IT POSSIBLE THAT MORE DIRECT ACCESS TO THESE FUNDS COULD BE INTRODUCED?

RESPONSE

WE HAVE ISSUED TWO RULINGS FOR SMALL BUSINESS INVESTMENT LIMITED PARTNERSHIPS AND ONE FOR A SMALL BUSINESS INVESTMENT CORP.

WE HAVE HAD A LARGE NUMBER OF GENERAL INQUIRIES

SUPPLEMENTARY QUESTIONS

QUESTION 1

WHERE AN INDIVIDUAL OR A CORPORATION TRANSFERS PROPERTY TO A CORPORATION ALL OF WHOSE SHARES HE OR IT ALREADY OWNS, WILL RCT INVOKE THE "BENEFIT" PROVISIONS IF THE VALUE OF THE SPECIFIC SHARE OR SHARES TAKEN BACK ON THE TRANSFER IS LESS THAN THE VALUE OF THE TRANSFERRED ASSETS?  THE VALUE OF THE TRANSFEROR'S ASSETS HASN'T CHANGED.

RESPONSE

THIS WAS RAISED AT THE 89 CTF

85(1)(E.2) APPLIES WHERE IT APPEARS REASONABLE TO CONCLUDE THAT THE EXCESS IS A BENEFIT THAT THE TAXPAYER WISHES TO CONFER ON THE CORPORATION.

IN OCTOBER 89 DEPT. OF FINANCE ANNOUNCED THAT THEY WOULD RECOMMEND A CHANGE TO 85(1)(E.2) TO PERMIT THIS TYPE OF TRANSACTION BETWEEN A PARENT AND SUBSIDIARY CORP.

QUESTION 2

BEFORE IMPLEMENTING AN ESTATE FREEZE FATHER HAD A VALUATION OF HIS SHARES PREPARED BY A FIRM OF BUSINESS VALUATORS. ON THE CORP REORG HE TOOK BACK SHARES HAVING A VALUE EQUAL TO THE VALUATOR'S OPINION AS TO THE VALUE OF HIS OLD SHARES. IF SUBSEQUENTLY IT IS DETERMINED THAT THE OLD SHARES HAD A GREATER VALUE, IS IT "REASONABLE TO REGARD" THE EXCESS AS A BENEFIT THAT FATHER "DESIRED TO HAVE CONFERRED" ON HIS CHILDREN WHO ARE THE COMMON SHAREHOLDERS?

RESPONSE

WE HAVEN'T DEALT WITH THIS BEFORE

DEPENDING ON THE CIRCUMSTANCES IT MAY BE REASONABLE TO REGARD THAT FATHER MAY HAVE WISHED TO CONFER A BENEFIT DESPITE THE VALUATOR'S REPORT.

QUESTION 3

IT 169 STATES THAT REVENUE CANADA WILL ACCEPT A FORM OF PRICE ADJUSTMENT CLAUSE UNDER WHICH THE PARTIES AGREE TO ACCEPT RCT'S DETERMINATION OF VALUE.  IS THIS THE ONLY FORM OF PRICE ADJUSTMENT CLAUSE THAT RCT WILL RECOGNIZE AS VALID.

RESPONSE

WE WILL RECOGNIZE CLAUSES MEETING ALL THE REQUIREMENTS SET OUT IN THE BULLETIN. IF THERE IS SOME OTHER POSITION DESIRED IT SHOULD BE SUBMITTED FOR OUR REVIEW.