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.
XXXXXXXXXX
Attention: XXXXXXXXXX
Dear Madam:
RE: Paragraph 84(1)(c.3) of the Income Tax Act (the "Act")
This is in reply to your letter of March 3, 1993 wherein you requested our interpretation regarding the application of paragraph 84(1)(c.3) of the Act to the following situation :
A Canadian resident individual has transferred shares (the "subject shares") of a corporation to another corporation (the "purchaser corporation") in consideration for shares of the purchaser corporation. A T-2057 election form has been filed in respect of the transfer and the agreed amount is equal to the fair market value of the subject shares. However, the purchaser corporation has increased its stated capital only by the amount of the stated capital of the subject shares, which amount is lower than their fair market value.
You asked us whether the issuance of shares of the purchaser corporation could be viewed, for the purposes of paragraph 84(1)(c.3), as not being an issuance of shares to which section 85 of the Act applies since the filing of the form T-2057 did not effect any deferral of tax on the accrued capital gain on the subject shares.
Our Comments:
It appears that the particular circumstances outlined in your letter on which you have asked our views is a factual situation involving a specific taxpayer and a completed transaction. You should submit all relevant facts and documentation to the appropriate district taxation office for their views. However, we are prepared to offer the following general comments which may be of assistance.
Subsection 85(1) of the Act applies to a situation where an election in prescribed form and in accordance with subsection 85(6) has been made in respect of a transfer of property. Where such an election is made, we are of the view that paragraph 84(1)(c.3) does not apply to allow the conversion into paid-up capital of contributed surplus arising on the issuance of shares covered by the election.
The foregoing comments are given in accordance with the practice referred to in paragraph 21 of Information Circular 70-6R2 and are not binding on Revenue Canada, Taxation.
Yours truly,
for DirectorReorganizations and Foreign DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch
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