31 March 1992 External T.I. 9201485 F - Capital Gains Deduction

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)     920148

S. Leung

(613)957-2115

Attention:  19(1)

March 31, 1992

Dear Sirs:

Re:  Subsection 110.6(8) of the Income Tax Act (the "Act")

We are writing in response to your letter of January 14, 1992, as amended by your letter of January 15, 1992, wherein you requested clarification of the Department's view on the application of subsection 110.6(8) of the Act to the following hypothetical situation outlined in your letters:

The Hypothetical Situation

24(1)

24(1)      

Your View and Your Request

It is your view that subsection 110.6(8) of the Act would not apply mainly because the gain of 24(1) realized by Mr. A as a result of the transfer of Holdco common shares as described in 6 above excludes the value of the common shares that relates to the fact that dividends were not paid on the original preferred shares of Holdco in the past.  In this regard, you referred to a copy of a technical interpretation issued by the Department on March 20, 1990.

You requested our confirmation that subsection 110.6(8) of the Act would not apply to the capital gain of 24(1) realized as a result of the transfer of Holdco common shares as described in item 6 above.  You also requested our view as to whether subsection 110.6(8) of the Act would apply if the original preferred shares of Holdco were not redeemed as described in item 5 above before the transfer by Mr. A of his original common shares of Holdco as described in item 6 above.  In addition, you requested our view as to whether our response to your first request would be different if the transfer described in item 6 above were made in contemplation of an arm's length sale of Holdco.

Our Comments

The situation outlined in your letter of January 14, 1992, as amended, appears to relate to actual proposed transactions involving identifiable taxpayers.  Confirmation as to the income tax consequences of proposed transactions can only be given in the context of an advance income tax ruling.  However, in accordance with the guidelines described in subparagraph 14(j) of Information Circular 70-6R2 it is not the Department's practice to issue rulings concerning the application of subsection 110.6(8) of the Act as it is a question of fact whether, having regard to all the circumstances, a significant part of a capital gain is attributable to the fact that dividends were not paid on a share (other than a prescribed share) of a corporation.  Notwithstanding the above, we can offer the following general comments.

Subsection 110.6(8) of the Act will apply if it may reasonably be concluded, having regard to all the circumstances, that a significant part of a capital gain is attributable to the fact that dividends were not paid on a share (other than a prescribed share) of a corporation.  On March 20, 1990, the Department issued a technical interpretation with respect to whether subsection 110.6(8) of the Act would apply to a certain specific fact situation.  In that technical interpretation, the Department expressed the view that, in the circumstances described therein, subsection 110.6(8) of the Act would not apply since it was reasonable in the circumstances to consider that no significant part of the capital gain that would be realized would be attributable to the fact that dividends were not paid on a share of a corporation which was not a prescribed share.  It is a question of fact whether or not, in a particular situation, a significant part of a capital gain is attributable to the fact that dividends were not paid on a share (other than a prescribed share) of a corporation.  However, provided that no portion of the gain which is reasonably attributable to the fact that dividends have not been paid on the non-prescribed shares has been realized, we would not expect that subsection 110.6(8) of the Act would be applied to deny the capital gains exemption.

It is also our general view that it would make no difference, for the purposes of determining whether subsection 110.6(8) of the Act applies to the disposition of the common shares, as to whether or not the preferred shares of a corporation were redeemed before the transfer of the common shares of the corporation by its shareholders or if such transfer of common shares is implemented in contemplation of a sale of the shares of the corporation to an arm's length person.

These comments are provided in accordance with the guidelines described in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990 and are not binding on Revenue Canada, Taxation.

Yours truly,

for DirectorReorganizations and Foreign DivisionRulings DirectorateLegislative and IntergovernmentalAffairs Branch