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.
961224 XXXXXXXXXX M. Symes 957-2091
Attention: XXXXXXXXXX
September 11, 1996
Dear Sirs:
Re: Subsection 15(1) of the Income Tax Act (the "Act")
This is in reply to your letter of April 2, 1996, wherein you requested our opinion as to whether subsection 15(1) of the Act would be applicable in a particular hypothetical situation.
We are of the opinion that subsection 15(1) of the Act would be applicable in a situation where, in consideration of the transfer of a property to a corporation in respect of which an election under subsection 85(1) of the Act is made, a shareholder receives properties (including rights of any kind whatever) the fair market value of which in the aggregate exceed the fair market value of the property transferred to the corporation.
Where on the transfer of a property to a corporation, the shareholder receives common shares of the capital stock of the transferee corporation and the transferee corporation grants the shareholder the right to give the transferred property as collateral security for a loan, subsection 15(1) of the Act would be applicable to the extent the aggregate fair market value of the common shares and the right granted to the shareholder exceeds the fair market value of the property transferred to the corporation. The determination of the fair market value of the right to use someone else's property as security for a loan is a question of fact. One method of calculating the fair market value of such a right would be to compare the difference between the interest rates charged with and without the corporation's collateral security. Another method would be to determine what the shareholder would have to pay a third party to provide a similar collateral security. The appropriate method of computing the fair market value of such right can only be determined on a case-by-case basis. For further comments, please see this Department's responses to question 62 of the Revenue Canada Round Table held on the occasion of the 1986 Canadian Tax Foundation's annual conference and question 24 of the Revenue Canada Round Table held on the occasion of the 1991 Canadian Tax Foundation's annual conference.
The preceding comments are based on the Act as of the date hereof without taking into account any future amendments thereto, whether currently proposed or not. Furthermore, these comments represent our opinion concerning the law as it applies generally. As indicated in paragraph 21 of Information Circular 70-6R2, this opinion is not a ruling and, accordingly, it is not binding on this Department.
We trust that these comments will be of assistance to you.
Yours truly,
for Director Reorganizations and International Division Income Tax Rulings and Interpretations Directorate Policy and Legislation Branch
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