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.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
March 27, 1994
Halifax District Office Head Office
Technical Advisor Rulings Directorate
A. Seidel
Attention: M. Chiasson (613) 957-8953
933322
Proposed Amendment to Subsection 85(2.1) of the Income Tax Act (the "Act")
This is in reply to your memorandum of November 16, 1993 wherein you requested our views as to the application of subsection 85(2.1) of the Act subsequent to the enactment of the changes proposed in the August, 1993 draft legislation.
We concur with your view that, in the situation where a taxpayer has transferred property to a corporation pursuant to subsection 85(1) of the Act and has received consideration in excess of the fair market value of the property transferred, the amendment to subsection 85(2.1) of the Act will operate to apply subsection 85(2.1) of the Act prior to subsection 84(1) of the Act. Accordingly, to the extent that the excess consideration exceeds the paid-up capital of the shares received by the taxpayer on the transfer, such amount will no longer be taxed as a deemed dividend but will be taxed as a shareholder's benefit pursuant to subsection 15(1) of the Act.
In our view, the proposed amendments to subsection 85(2.1) of the Act are correctly founded on the assumption that property will be transferred to a corporation by its shareholders for consideration that does not exceed the fair market value of the transferred property. In the case where the consideration received exceeds the fair market value of the property, we do not believe that it is inappropriate that such excess consideration be included in the shareholders income under subsection 15(1) of the Act as an appropriation of corporate property.
In our opinion, the position described in Interpretation Bulletin IT-169 titled "Price Adjustment Clauses" was intended to provide administrative relief in this type of situation provided that the taxpayers have made a bona fide attempt to value the property and they have complied with the other conditions set out in the bulletin.
We hope these comments are of assistance to you.
Chief
Corporate Reorganizations III Section
Reorganizations and Foreign Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch
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