2 February 1995 External T.I. 9431635 - CAPITAL GAINS EXEMPTION

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:

Can the capital gains exemption be claimed in a non-arm's length transaction.

Position TAKEN:

Yes it is possible. General comments on exemption and election provided.

Reasons FOR POSITION TAKEN:

IC-88-2 Supplement.

		5-943163
XXXXXXXXXX		C. Chouinard

Attention: XXXXXXXXXX

February 2, 1995

Dear Sir:

Re: Capital Gains Exemption

We are writing in response to your letter of December 6, 1994, wherein you requested our comments on the availability of the capital gains exemption in a situation involving a sale by a taxpayer of shares held in one corporation to another corporation of which he is also a shareholder.

In the February 22, 1994 budget, the federal government announced that the $100,000 capital gains exemption would no longer be available for capital property or eligible capital property sold after February 22, 1994. However, taxpayers who owned such property at the end of February 22, 1994 and who have not used all of their $100,000 capital gains exemption, may file a one-time election. The election allows taxpayers to report a capital gain to take advantage of the unused portion of their $100,000 capital gains exemption, even though they did not actually sell their property.

Although the $100,000 capital gains exemption was eliminated, the $500,000 capital gains exemption is still available for the disposition of qualified small business corporation shares and qualified farm property after February 22, 1994. Therefore, since the $500,000 capital gains exemption has not been eliminated, there is no need to file the election introduced in the last budget to take advantage of this exemption. However, an election can be filed in respect of qualified small business corporation shares and qualified farm property, if they constitute capital property or eligible capital property, to take advantage of any unused portion of the $100,000 capital gains exemption. If such an election is filed, the shares or the farm property, as the case may be, will continue to be eligible for the $500,000 capital gains exemption, to the extent of the unused portion of the exemption, if they meet the definitions of "qualified small business corporation share" and "qualified farm property" in subsection 110.6(1) of the Income Tax Act (the "Act").

With respect to the situation described above, we note that example 3 of Supplement 1 to Information Circular 88-2 (a copy of which is enclosed) describes a transaction not unlike the one you refer to and that the Department's position with respect to such transactions is that they would not be viewed as an abuse of the Act read as a whole.

Although we cannot comment further on the situation you describe, by reason of the limited information you have provided, we caution that any of subsections 84.1(1), 110.6(7) or 110.6(8) of the Act may apply where shares are sold.

We also enclose a copy of Interpretation Bulletin IT-489 which sets out the Department's views on the issues relating to section 84.1 of the Act.

We trust that these comments will be of assistance.

Yours truly,

R. Albert
for Director
Business and General Division
Rulings Directorate
Policy and Legislation Branch