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:
- Why does subsection 84.1(1) penalize a individual for selling shares of a corporation to a related corporation?
Position TAKEN: N/A
Reasons FOR POSITION TAKEN:
- Writer is unhappy with tax policy and this matter should be discussed with the Department of Finance.
950622
XXXXXXXXXX M.P. Sarazin
(613) 957-2118
Attention: XXXXXXXXXX
March 22, 1995
Dear Sirs:
Re: Section 84.1 of the Income Tax Act
This is in reply to your facsimile dated March 1, 1995 wherein you requested our comments on the application of subsection 84.1(1) of the Income Tax Act (the "Act") in the following situation.
Opco is a Canadian-controlled private corporation. Opco's issued share capital consists of common shares which are all owned by the members of one family. Father owns 50%, Mother owns 40% and two adult children each own 5% of Opco's issued common shares. The common shares are qualified small business corporation shares. One of the adult children also owns all of the issued shares of a second corporation ("Purchaseco"). Purchaseco would like to acquire all of Opco's issued common shares. The expressions "Canadian-controlled private corporation" and "qualified small business corporation shares" have the meanings assigned by subsections 125(7) and 110.6(1) of the Act, respectively.
If Purchaseco acquires the shares of Opco, you are aware that the provisions of subsection 84.1(1) of the Act would apply to the disposition of the Opco shares held by the family members and, as a result, a dividend will be deemed to have been paid by Purchaseco to each of the family members. On the other hand, if the shares of Opco are sold to an arm's length third party then the family members would realize a capital gain which would be eligible for the capital gains exemption under subsection 110.6(2.1) of the Act. You believe that the family members would be inequitably penalized if the provisions of subsection 84.1(1) are applied in the above situation.
It appears that the interpretation you seek relates to proposed transactions to be undertaken by specific taxpayers and, therefore, we bring to your attention Information Circular 70-6R2 dated September 28, 1990 and the Special Release thereto dated September 30, 1992, issued by Revenue Canada, Customs, Excise and Taxation. Confirmation with respect to proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. If you wish to obtain an advance income tax ruling for a particular taxpayer with respect to specific transactions which are contemplated, a written request for an advance income tax ruling can be submitted in accordance with the Information Circular. Nevertheless, we can confirm that section 84.1 will apply whenever an individual resident in Canada disposes of capital property consisting of shares in a Canadian corporation (the subject corporation) to another corporation in a non-arm's length transaction following which the subject corporation is connected with the purchaser corporation within the meaning of subsection 186(4).
As to whether section 84.1 was intended to apply to the situation described in your letter involves a matter of tax policy and, therefore, should be directed to the Department of Finance which is responsible for the formulation of tax policy.
Yours truly,
for Director
Reorganizations and Foreign Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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