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: Mr. A will ordinary control Newco (and therefore be related to Newco) immediately before the issuance of shares of Newco by virtue of his being the incorporator of Newco
XXXXXXXXXX 970040
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 January 6, 1997, wherein you requested a technical interpretation as to the application of paragraph 55(3)(a) of the Act to the following situation:
1. Mr. A owns all of the shares of Opco. Opco owns a business and real estate.
2. Mr. A incorporates Newco and, later that day, issues 100 common shares to himself as the first issued shares of Newco. Mr. A then transfers Opco shares to Newco having a fair market value equal to the fair market value of the real estate. He receives redeemable and retractable Newco preference shares having a fair market value also equal to the fair market value of the real estate. An election under section 85 of the Act is prepared and filed.
3. Opco transfers the real estate to Newco under section 85 of the Act in exchange for redeemable and retractable Newco shares having a fair market value equal to the fair market value of the real estate.
4. The Opco shares owned by Newco are repurchased for cancellation and the Newco shares owned by Opco are redeemed.
You enquire as to whether subparagraph 55(3)(a)(v) would apply to the above situation.
In our view, the subscription for common shares of Newco by Mr. A would not result in a significant increase in interest in Newco of an unrelated person for purposes of subparagraph 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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