28 August 1995 Internal T.I. 9521867 - identical properties

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.Where identical shares are acquired, how is the actual cost of newly- acquired shares taken into consideration?

2.Where the acquisition of newly-acquired shares, how is the 53(1)(j) bump in ACB taken into consideration?

Position TAKEN:

1.A deemed cost of all shares is determined, based on a weighted average of the cost of the newly-acquired shares and the ACT of all previously-acquired shares (including escrowed shares).

2.The 53(1)(j) bump applies only with respect to the newly-acquired shares. The taxpayer would have disposed of some newly-acquired shares and some previously-acquired shares (but not any escrowed shares, under the circumstances), so only a portion of the 53(1)(j) bump is taken into consideration in determining the current year's gain.

Reasons FOR POSITION TAKEN:

Based on previous letter on this file to the D.O.

				August 28, 1995

Mr. H.C. Beaulac	HEADQUARTERS
	Assistant Director, Audit	J.D. Brooks
	Ottawa Tax Services Office	957-8953

	Attention:  Kevin O'Reilly
	            Business Audit
			952186

Application of Paragraph 53(1)(j) and Subsection 47(1)
XXXXXXXXXX

This memorandum is in reply to your request of August 17, 1995 to review your proposed reply to a letter dated August 9, 1995 from XXXXXXXXXX which concerns a proposed reassessment of XXXXXXXXXX

XXXXXXXXXX

The second question raised by the taxpayer's representative is how the actual cost of the newly-acquired shares is taken into consideration. As you are aware, subsection 47(1) calculates a deemed cost of all shares, which is the weighted average of the cost of the newly-acquired shares and the adjusted cost base ("ACB") of all previously-acquired shares (both free and escrowed shares, since they are identical properties). The paragraph 53(1)(j) adjustment that relates to the exercise of the option in 1994 is not considered in the averaging formula in subsection 47(1) since that subsection only considers the cost of the newly-acquired shares. Since subsection 47(1) is relevant by virtue of the acquisition of shares, you may find it easier to reply to the second question first.

In addressing the first question, you correctly noted that XXXXXXXXXX would have disposed of a portion of the previously-acquired free shares and a portion of the newly-acquired shares. In explaining the impact of the paragraph 53(1)(j) adjustment, you might state that the adjustment applies only in calculating the ACB of the newly-acquired shares since these were the shares that triggered the section 7 benefit. However, since only a portion of the newly-acquired shares would have been disposed of in 1994, only a portion of the paragraph 53(1)(j) adjustment will be used in the calculation of the capital gain in that year. The ACB of shares sold in 1994 will be based on the appropriate portions of:

a)the ACB of the previously-acquired free shares (this ACB will be equal to their deemed cost under subsection 47(1)); and

b)the ACB of the newly-acquired shares (this ACB will be equal to their deemed cost under subsection 47(1) plus the paragraph 53(1)(j) adjustment).

Therefore, if 1% of the shares sold in 1994 were determined to be newly-acquired shares, only 1% of the paragraph 53(1)(j) adjustment will be taken into consideration in calculating the 1994 capital gain. It is not technically accurate to say that the paragraph 53(1)(j) adjustment is averaged over all the free shares on hand. You will also notice that the ACB of the previously-acquired escrowed shares are considered in applying subsection 47(1), although their ACB is irrelevant to determining the ACB of the shares sold since only the free shares of XXXXXXXXXX are considered to have been sold.

The portion of the paragraph 53(1)(j) adjustment that is not relevant to the calculation of the capital gain in 1994 (the "remaining paragraph 53(1)(j) adjustment") remains as an adjustment that applies to the shares that were newly-acquired shares in 1994 and remain on hand. If he did not acquire more shares but sold shares in 1995, XXXXXXXXXX would be considered to sell some shares to which the remaining paragraph 53(1)(j) adjustment applied and some shares to which the remaining paragraph 53(1)(j) adjustment did not apply -- similar to the calculation for 1994 except there would be no subsection 47(1) recalculation. However, if in 1995 XXXXXXXXXX were to acquire more identical shares (which would be described in 1995 as newly-acquired shares in subsection 47(1)), the cost of those new shares would be averaged pursuant to subsection 47(1) with the ACB of the shares he already had on hand. Therefore, the remaining paragraph 53(1)(j) adjustment would be included in the ACB of the shares he already had on hand (which would be described in 1995 as previously-acquired shares in subsection 47(1)).

All shares will have the same deemed cost pursuant to subsection 47(1). However, at the end of 1994, XXXXXXXXXX will own one group of free shares which have a paragraph 53(1)(j) adjustment and he will own another group of free shares which are not subject to such adjustment.

We trust that this explanation will assist you in finalizing your letter to the representative.

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