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.
Principal Issues:
Does a benefit accrue to either freezor or children on "refreeze transactions.
Position:
No.
Reasons:
On May 15, 1997, the Review Committee agreed with our recommendation to reverse our long-standing position that we would consider a benefit to arise on "refreeze" transactions. A detailed analysis of the issues involved can be found in our submission to the Review Committee dated May 6, 1997 - document # 951901. This letter marks our first application of the new position.
XXXXXXXXXX
Attention: XXXXXXXXXX
Dear Sirs:
Re: Technical Interpretation Request - "Refreeze" Transaction
This is in response to your letter of February 26, 1996 and our telephone conversation of May 20, 1997 in which you requested our opinion regarding the transactions described below.
Several years ago, Mr. X transferred real property (the "Property") to a corporation for redeemable retractable preferred shares of that corporation (the "Preferred Shares") having a redemption value and retraction value equal to the fair market value of the real property at the time of the transfer. At the time Mr. X received the Preferred Shares, common shares of the corporation were issued to his children for a nominal amount.
Today the value of the Property is significantly less than at the time it was transferred to the corporation by Mr. X. It is proposed that Mr. X exchange the Preferred Shares for new preferred shares having a redemption and retraction value equal to the present fair market value of the Preferred Shares.
You have inquired as to whether, under the Income Tax Act (the "Act") any benefit would have been considered to have been conferred on either Mr. X or his children as a result of the proposed transaction.
Our Views
The income tax consequences of this type of transaction were addressed by us in our answer to question 53 of the 1985 Revenue Canada Round Table where we stated that we would consider that a benefit has been conferred on the common shareholders.
Recently we have had occasion to reconsider our position. Accordingly, provided that the decrease in value of the preferred shares in this type of transaction is not the result of the stripping of corporate assets, we would not ordinarily consider a benefit to have been conferred on the common shareholders or Mr. X on the exchange by Mr. X of the Preferred Shares for new preferred shares.
The foregoing comments represent our general views with respect to the subject matter of your letter. As indicated in paragraph 22 of Information Circular 70-6R3, this is not an advance income tax ruling and is therefore not binding on Revenue Canada.
Yours truly
for Director
Reorganizations and International Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch
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