4 April 1990 Income Tax Severed Letter 90M04438 F - Transfers for Inadequate Consideration

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

     PART II

Transfers for Inadequate Consideration

{ 85(1)(e.2); 86(2); 87(4) and 51(2) }

The corporate reorganization sections in the Income Tax Act contain provisions which impose "penalties" for transfers to or share exchanges with corporations where the value of the property given up exceeds the value of the property received, and "it is reasonable to regard any part of such excess as a benefit that the taxpayer desired to have conferred on a person related to the taxpayer." These provisions give rise to the following questions:

1.     Where an individual or a corporation transfers property to a corporation all of whose shares he or it already owns, will Revenue Canada 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.

2.     Before implementing an estate freeze, Father had a valuation of his shares prepared by a firm of business valuators.  On the corporate reorganization he took back shares having a value equal to the valuators' 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?

3.     Interpretation Bulletin IT-169 states that Revenue Canada will accept a form of price adjustment clause under which the parties agree to accept Revenue Canada's determination of value.  Is this the only form of price adjustment clause which Revenue Canada will recognize as valid?

4.     Consider the following fact situation.  Father set up Old Opco many years ago and the adjusted cost base of his shares is $100. Old Opco prospered and financed itself by reinvesting its earnings.  His sons wanted into the business so he caused Opco to transfer the business assets, worth $450,000 and with an ACB of $250,000, to New Opco.  His sons subscribed for 2 common shares for $2.00.  Old Opco received $450,000 worth of common shares.  Sometime later New Opco reorganized its capital and Old Opco exchanged its New Opco commons for $250,000 worth of preference shares.  The sons now owned all of the common shares.  It appears that the effect of subsection 86(2) is that Old Opco is deemed to have disposed of its New Opco common shares for $200,000.  Since the ACB of those shares was $250,000 Old Opco doesn't realize a capital gain.  The adjusted cost base of the New Opco preference shares is deemed to be $50,000.  The value of Father's shares of Old Opco is now reduced by $200,000 and the value of the sons common shares is increased by $200,000.  Is this analysis correct?

5.     Suppose in this case immediately before a sale of New Opco, the preference shares were redeemed.  Prior to the transfer of the business assets to New Opco, Old Opco had safe income of over $250,000.  Will subsection 55(2) apply to the deemed dividend on the redemption?

6.     When the reorganization of New Opco shares took place the sons were considering whether to sell the business or to continue to operate it.  They tried for another 2 years to operate it but disagreements about policy matters finally made them decide to sell.  Are the sons ineligible to claim the capital gains exemption by reason of subsection 110.6(7)?

JMF/tw

24(1)