27 November 1997 External T.I. 9702035 - GRANDFATHERING

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:

Ordering of disposition of grandfathered shares.

Position:

We will accept that the first shares disposed of will be grandfathered.

Reasons:

In accordance with tax policy.

	                       	970203
XXXXXXXXXX	                      D.A. Palamar
                                	957-2127

Attention: XXXXXXXXXX

November 27, 1997

Dear Sirs:

Re: Subsection 112(3.2) of the Income Tax Act (the "Act")

This is in reply to your letter of January 21, 1997 wherein you requested our opinion on the application of proposed subsection 112(3.2) of the Act contained in the Legislative Proposals and Explanatory Notes Relating to Income Tax released by the Minister of Finance on July 31, 1997.

We understand the relevant facts to be as follows:

Mr. A owned all the shares in two operating companies, Opco 1 and Opco 2. On April 26, 1995, Opco 1 owned a life insurance policy on Mr. A, of which Opco 1 was the beneficiary, that (we assume) was intended to fund the purchase back for cancellation of his Opco 1 shares. Therefore, the Opco 1 shares are grandfathered. After April, 1995 and before November 20, 1996, Mr. A transferred all his shares in Opco 1 and Opco 2 to Holdco on Section 85 rollovers in return for 100 Common shares of Holdco. The 67 Common shares Mr. A received from Holdco for his Opco 1 shares are indistinguishable from the 33 Common shares he received from Holdco for his Opco 2 shares.

Prior to April 1997, Opco 1, Holdco, and Mr. A entered into agreements whereby the insurance proceeds received by Opco 1 on Mr. A's death will be used by Opco 1 to buy back its shares held by Holdco, and for Holdco to then use the proceeds received to buy back 67 Common shares of Holdco owned by the Estate. The agreements will require appropriate elections under subsection 83(2) to be made by both Opco and Holdco.

Therefore, on Mr. A's death, while 67 of the 100 Common shares are grandfathered, it is not possible to specifically identify the 67 grandfathered shares.

Interpretation Requested

You have requested our views regarding whether we would accept that the first 67 Common shares of Holdco purchased back by Holdco after Mr. A's death are the grandfathered shares such that subsection 112(3.2) will not apply.

Our Opinion

We agree with your views that the first 67 Common shares of Holdco purchased back by Holdco after Mr. A's death can be considered to be the grandfathered shares such that subsection 112(3.2) will not apply.

The foregoing opinion is not a ruling and, in accordance with the guidelines set out in Information Circular 70-6R3 dated December 30, 1996, is not binding on the Department. In providing this opinion, we provide no assurance regarding the application or non-application of any provision of the Act to any of the transactions described except as specifically stated.

We trust that these comments will be of assistance to you.

Yours truly,

for Director
Reorganization and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch