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.
Dear Sirs:
RE: Sections 183.1 and 245 of the Income Tax Act (Canada) ("the Act")
This is in reply to your letter of July 14, 1988 in which you requested our views concerning the application of section 183.1 of the Act to a hypothetical situation. In a telephone conversation on September 26, 1988 you also requested our views concerning the application of subsection 245(2) of the Act to that situation. The hypothetical situation which you described can be summarized as follows:
1. Two individuals ("X" and "y") each own 50% of the common shares of a corporation ("the Corporation"). There is only one issued and outstanding class of shares in the Corporation. The paid-up capital ("PUC") of the common shares of the Corporation is nominal.
2. X and Y deal with each other at arm's length.
3. The adjusted cost base ("ACB") to X of his shares of the Corporation s greater than the PUC in respect of such shares. The fair market value ("FMV") of those shares is greater than the ACB thereof.
4. Y wishes to sell his shares in the Corporation. The FMV of his shares is greater than his ACB of such shares.
5. Accordingly, Y would then transfer his shares in the Corporation to a newly-formed wholly-owned holding company ("Holdco") Pursuant to subsection 85(1) of the Act, electing at an agreed amount equal to X's ACB of the shares. As consideration for the transfer Y would receive a note equal to his ACB of the transferred shares and shares of Holdco having a value equal to the difference between the FMV and X's ACB of the transferred shares.
6. Y would then sell his shares of the Corporation to Holdco.
Our Comments
1. We will generally not interpret section 183.1 of the Act, as it read prior to its repeal and replacement under S.C. 1986-87-88, c. 55, as being applicable to transactions of the type described above, as a result of those transactions, in and by themselves.
2. The provisions of subsection 245(2) of the Act will generally not be applied to transactions of the type described above, as a result of those transactions, in and by themselves.
The above comments are based only on the provisions of the Act referred to above and should not be interpreted as implying that any other provision of the Act would or would not apply to, or as a result of, any actual transactions or events similar to those described in the situation above.
In accordance with the practice described in paragraph 24 of Information Circular 70-6R, the foregoing responses are opinions and not rulings.
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© Her Majesty the Queen in Right of Canada, 1988
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© Sa Majesté la Reine du Chef du Canada, 1988
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