6 December 1994 Internal T.I. 9406027 - CERTIFICATE LIMIT

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.

		December 6 1994
	Montreal District Office	Rulings Directorate
	section 443-1-3	Reorganizations and
		Foreign Division
	Attention: Christiane Côté
(613) 957-2129

		7-940602

Proceeds of disposition for the purposes of section 116 of the Income Tax Act (the "Act")

You requested our views as to what should be, for the purposes of section 116 of the Act, the proceeds of disposition when:

-some provisions of the Act deem an amount to be the proceeds of disposition (e.g. 85(1), 54) and,

-the purchaser and the seller deal with each other at arm's length, which makes subsection 116(5.1) of the Act inapplicable.

More specifically, you ask what should be the "certificate limit" in the following situations where the purchaser and the seller deal with each other at arm's length:

Situation A

The corporation (purchaser), a corporation resident in Canada, redeems shares belonging to a non resident shareholder (seller) for an amount of 5 million dollars. The paid-up capital of the shares being $200,000, subsection 84(3) of the Act deems a dividend of $4,800,000 and, according to the definition provided for in section 54 of the Act, the proceeds of disposition are deemed to be $200,000.

You mentioned that according to subsection 116(2) of the Act, the "certificate limit" should be equal to the proceeds of disposition and that paragraph 18 of the Information Circular IC-72-17R4 states that "the term "proceeds of disposition" is defined in paragraph 54(h) of the Act". Consequently, you would tend to think that the certificate limit should be $200,000.

The representative of the non-resident maintains however that the preamble of section 54 being "In this subdivision", the definition given of "proceeds of disposition in that section should only be used for the purposes of calculating taxable capital gains and allowable capital losses. He also mentions that a certificate limit of $200,000 would penalize the purchaser who would be "protected" for only $200,000 although he would have incurred a disbursement of $5,000,000 upon the redemption.

Our comments

We believe that since section 116 of the Act is in relation to capital gain on taxable Canadian property, that it is possible to argue that the term "proceeds of disposition" in section 116 of the Act should be interpreted in accordance with the definition of section 54 of the Act. Also, the position in our letter that you referred to (document E9211712) should apply in such situation even though the purchaser and the seller deal with each other at arm's length. In such a manner, where the proceeds of disposition determined in accordance with the definition in section 54 of the Act result in no capital gain and no Part I tax liability and we are satisfied that the disposition was not part of a series of transactions designed to avoid tax, the acceptable security to the Minister for purposes of paragraph 116(2)(b) of the Act would be nil.

Situation B

A non-resident person disposes of taxable Canadian property to a corporation, in exchange for a 10% interest in the capital stock of the corporation. The property disposed of has a fair market value of $1,000,000 while the ACB is $50,000. The 85(1) election is made and the parties elect an agreed amount of $50,000.

You ask what should be the certificate limit.

Our comments

In our opinion, the certificate limit should be $50 000. In any event, the capital stock received by the transferor will continue to be a taxable Canadian property by virtue of paragraph 85(1)(i) of the Act.

for Director
Reorganizations and Foreign Division
Rulings Directorate
Policy and Legislation Branch