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.
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File: 7-912219 |
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Officer: P. Diguer |
ROUND TABLE - CGA - JANUARY 10, 1992
QUESTION #14
A, an individual, has owned prescribed common shares and non-prescribed preferred shares in B Ltd for some years. A's prescribed shares are "qualified small business corporation shares". No dividend has ever been paid on the non-prescribed shares (issued for financing purposes). The unpaid dividends total $50,000, which represents a reasonable rate of return. B, an unrelated person, wishes to purchase A's common shares for $400,000. The adjusted cost base of the shares is zero. The following transactions take place:
- Before the sale, A transfers all his/her common shares to a new corporation (GESCO) in return for GESCO shares. The transaction takes place under section 85 of the Act and the elected amount is $350,000, resulting in a $350,000 capital gain for A. The shares issued by GESCO to A thus have an adjusted cost base of $350,000 and a value of $400,000.
- A then sells the GESCO shares to B for $400,000, thereby realizing another capital gain of $50,000.
If the Department decided to apply subsection 110.6(8) of the Act, would it disallow the deduction to the extent of $300,000 (75% of $400,000) or would it disallow only $37,500 (75% of $50,000) inasmuch as the first sale to GESCO resulted only in a gain of $350,000 on $400,000, i.e. a gain reduced by the amount of the unpaid dividends on the non-prescribed shares?
ANSWER
The Department is of the opinion that in the situation described above, the provisions of subsection 110.6(8) of the Act would not apply to the sale of the shares in B Ltd to GESCO, since no significant part of the capital gain is attributable to the fact that dividends were not paid on a share of B Ltd. We are also of the opinion that subsection 110.6(8) of the Act would apply to the sale of the GESCO shares to B, since a significant part of the capital gain is attributable to the fact that dividends were not paid on the non-prescribed shares.
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