26 August 1991 Income Tax Severed Letter 911909 F - Gain or Loss Arising on the Disposition of "Exchanged 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:  Section 85.1 of the Income Tax Act

This is in reply to your letter dated July 12, 1991 in which you requested:

(i)     our interpretation of the phrase "any portion of the gain or loss" in paragraph 85.1(1)(a) of the Income Tax Act (the "Act), and

(ii)     our views regarding the application of sections 85.1 and 245 of the Act to the hypothetical series of transactions described below.

Facts and Hypothetical Series of Transactions

1.     

24(1)

2.     

3.     

4.                       24(1)

Our Comments

The situation outlined in your letter appears to relate to specific proposed transactions with identifiable taxpayers.  Confirmation of the tax consequences relating to specific proposed transactions will only be provided in response to a request for an advance income tax ruling.  The procedures for requesting an advance ruling are set out in Information Circular 70-6R2 dated September 28, 1990.  We can, however, offer the following general comments.

The Department's general position with respect to the application of section 85.1 of the Act is outlined in Interpretation Bulletin IT-450 dated June 13, 1980 as amended by Special Release dated July 31, 1986.

We agree with your conclusion that the reference to the phrase "any portion of the gain or loss" in paragraph 85.1(1)(a) of the Act prevents the provisions of subsection 85.1(1) of the Act from applying when any part of the gain or loss arising on the disposition of the "exchanged shares" has been included in computing the vendors income for the year.

Paragraph 5 of IT-450, as amended, recognizes that in certain circumstances, a vendor may divide his shares into two blocks for the purpose of subsection 85.1(1) of the Act.  This paragraph states:

    "Where a vendor receives shares for some of the exchanged shares and cash or other consideration for other exchanged shares, subsection 85.1(1) may be utilized in respect of the exchanged shares for which shares were received, as long as the vendor can clearly identify which shares were exchanged for cash or other consideration and which (shares) were exchanged for shares."

Accordingly, it is our view that the term "exchanged shares" in subsection 85.1(1) of the Act refers to shares that may be clearly identified as exchanged for consideration (share or non-share) that also may be clearly identified.

Whether subsection 245(2) of the Act will apply to a specific situation can only be determined following a review of all the relevant facts related to that situation.  In general, the fact that shares are divided into two blocks for the purpose of a share for share exchange, would not, in and by itself, result in the application of subsection 245(2) of the Act.

These comments represent our general views with respect to the subject matter of your letter.  The facts of a particular situation may result in a different result.  The foregoing comments are not rulings and, in accordance with the guidelines set out in Information Circular IC 70-6R2 dated September 28, 1990, are not binding on the Department.

Yours truly,

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