7 July 1998 External T.I. 9641165 - EXEMPTION FROM 55(2)

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: whether the exemption in paragraph 55(3)(a) is applicable

Position: yes

Reasons: In accordance with the position taken at the 1997 APFF, the issuance of shares does not represent an event described in subparagraph 55(3)(a)(ii)

XXXXXXXXXX 964116
F. Francis

Attention: XXXXXXXXXX

July 7, 1998

Dear Sirs:

Re: Amendments to paragraph 55(3)(a) of the Income Tax Act (the "Act")
contained in Bill C-28 which received Royal Assent on June 18, 1998

This is in reply to your letter of December 13, 1996, wherein you requested a technical interpretation in respect of the following hypothetical situation:

- Mother and Son (an adult) are both residents of Canada and own shares of Holdco, a Canadian-controlled private corporation within the meaning of the Act.

- Holdco owns all the outstanding shares of Subco, a Canadian- controlled private corporation.

- Mother and Son wish to transfer certain assets of Holdco (consisting of the shares of Subco) to a new company.

- A new company would be created ("Newco").

- Mother and Son would transfer shares of Holdco to Newco with a value equal to the value of the Subco shares. The only consideration received by Mother and Son would be shares of Newco. An election would be filed under section 85 of the Act to defer any capital gain which would otherwise be realized as a consequence of the transfer of the Holdco shares to Newco.

- Holdco would transfer all of its Subco shares to Newco with a value equal to the value of the Holdco shares that Mother and Son will transfer to Newco and the only consideration that Holdco will receive on this transfer would be Newco preferred shares of equal value. An election would be made under section 85 of the Act to defer any capital gain.

- The Holdco shares (owned by Newco) and the Newco preferred shares (owned by Holdco) would be redeemed to eliminate the intercorporate shareholding between Newco and Holdco. These redemptions of shares will cause deemed dividends to be realized in each of Newco and Holdco.

You request our opinion on whether subsection 55(2) of the Act would apply on the above redemption of shares. In particular, you would like our views as to whether there would be a significant increase in the total direct interests in Newco of one or more persons who are unrelated persons immediately before the particular time within the meaning of subparagraphs 55(3)(a)(ii) and (v).

Our Comments

The situation described in your letter would appear to involve an actual proposed transaction. Assurance as to the tax consequences of actual proposed transactions will only be given in the context of an advance income tax ruling. The procedures for requesting an advance income tax rulings are outlined in Information Circular 70-6R3 dated December 30, 1996, issued by Revenue Canada. However, we can offer the following comments which we hope will be of assistance to you.

In our view, the issuance of shares of Newco in the above-described situation would not represent an event described in subparagraph 55(3)(a)(ii) or 55(3)(a)(v) of the Act.

We trust our 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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