21 April 1994 External T.I. 9337785 - STOP-LOSS RULE

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.

Principal Issues:

1. Whether subsections 85(4) and 85(5.1) apply where a taxpayer and his spouse transfer jointly owned buldings to a corporation in exchange for notes receivable and preferred shares and the common shares of the corporation are owned by their sons?

2. Whether another stop-loss rules could apply?

Position TAKEN:

1. Question of fact.

2. 13(21.1) may apply depending on the circumstances.

Reasons FOR POSITION TAKEN:

De facto control applies for 85(4) and 85(5.1). However, 85(4) and 85(5.1) do not apply where a group of persons of which the transferor is a member controls in fact the corporation immediately after the transfer.

			5-933778

XXXXXXXXXX R. Gagnon

Attention: XXXXXXXXXX

April 21, 1994

Dear Sirs:

Re: Subsections 85(4) and 85(5.1) of the Act

This is in reply to your letter of December 9, 1993 wherein you requested a technical interpretation addressed to the Director of the T2 and T3 Programs Division. Your request has been forwarded to the Rulings Directorate for reply. We apologize for the delay in replying.

The situation outlined in your letter appears to involve actual proposed transactions with identifiable taxpayers. As indicated in Information Circular 70-6R2, we do not express opinions on specified proposed transactions other than as a reply to an advance income tax ruling. While we are unable to comment on the income tax consequences attendant on the specific facts described in your letter, the following general comments may be of assistance to you.

All references to statute are to the Income Tax Act S.C. 1970-71-72,c.63 as amended consolidated to June 10, 1993 (the "Act").

Subsections 85(4) and 85(5.1) of the Act apply where an individual has disposed respectively of any capital property or depreciable property of a particular class to a corporation that immediately after the disposition was controlled, directly or indirectly in any manner whatever, by the individual or his or her spouse.

Subject to certain specified exceptions, a corporation is considered to be "controlled, directly or indirectly in any manner whatever" pursuant to subsection 256(5.1) of the Act if a "controller" (as defined therein) has any direct or indirect influence that, if exercised, would result in control in fact of the corporation. Whether or not there exists direct or indirect influence that, if exercised, would result in control in fact of a corporation is a question of fact to be based on all the circumstances. Some general factors that may be used in determining whether de facto control exists are included in paragraph 19 of Interpretation Bulletin IT-64R3. These factors include the ownership by a person of a large debt of a corporation which may become payable on demand or a substantial investment in retractable preferred shares.

Subsections 85(4) and 85(5.1) of the Act do not apply where a group of persons of which the transferor is a member controls in fact the corporation immediately after the transfer.

Subsection 13(21.1) of the Act provides other stop-loss rules which may apply to the disposition of a building depending on the circumstances.

The foregoing opinions are not rulings and, in accordance with the guidelines set out in Information Circular 70-6R2 dated September 28, 1990, are not binding on the Department.

We trust our comments will be of assistance to you.

Yours truly,

for Director
Financial Industries Division
Rulings Directorate