13 June 1997 External T.I. 9706125 - COST OF CAPITAL INTEREST IN A TRUST

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 a capital interest in a trust (a) which is deemed to be reacquired by paragraph 111(4)(e), or (b) "acquired" on an amalgamation; has, for purposes of subsection 107(1.1) been acquired from a beneficiary thereof

Position: Yes

Reasons:

(a) consistent with position taken with respect to subsection 48(3); (b) paragraph 87(2)(e)

XXXXXXXXXX 970612

Attention: XXXXXXXXXX

June 13, 1997

Dear Sirs:

Re: Subsection 107(1.1) of the Income Tax Act (the "Act")

This is in reply to your letter of February 27, 1997 in which you requested a technical interpretation concerning subsection 107(1.1) of the Act under two scenarios. Both scenarios involve a taxable Canadian corporation, Company A, which owns a capital interest in a personal trust (as defined in subsection 248(1) of the Act) which constitutes capital property to it.

In the first scenario, an election is made by Company A under paragraph 111(4)(e) of the Act to increase the cost of the capital interest in the trust immediately before an acquisition of control of Company A. Under paragraph 111(4)(e) of the Act, Company A is deemed to have disposed of the capital interest in the trust immediately before the acquisition of control for proceeds of disposition equal to the lesser of the two amounts specified in subparagraphs 111(4)(e)(i) and (ii). The capital interest is also deemed to have been reacquired by Company A for an amount equal to the above proceeds. At issue is whether, for the purposes of subsection 107(1.1), the capital interest in the trust which is deemed to have been reacquired by Company A under paragraph 111(4)(e) would be considered to be a property that has been acquired by Company A from a person who was the beneficiary in respect of the interest immediately before the acquisition thereof by Company A, with the result that subsection 107(1.1) would not apply to reduce the cost to nil.

In the second scenario, Company A would amalgamate with its parent corporation (which owns 100% of the shares of Company A) to form a new corporation, Amalco. Section 87 of the Act would govern this vertical amalgamation. A designation is made pursuant to proposed subsection 87(11) to increase the cost of the capital interest to an amount not exceeding the fair market value of the capital interest in the trust at the time the parent last acquired control of Company A. At issue in this scenario is whether, for the purposes of subsection 107(1.1), the capital interest which became property of Amalco on the amalgamation would be considered to be a property that has been "acquired" by Amalco from a person who was the beneficiary in respect of the interest immediately before the acquisition thereof by Amalco.

Our comments

The interpretation you seek appears to relate to a proposed transaction to be undertaken by specific taxpayers and, therefore, we bring to your attention Information Circular 70-6R3 dated December 30, 1996 issued by Revenue Canada, Customs, Excise and Taxation. Confirmation with respect to proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. Where, however, the issue to be considered involves a question of fact, the Department will not rule unless all of the relevant facts are known. Nevertheless, we can offer the following general comments.

Where a capital interest in a personal trust is deemed to have been reacquired by a corporation by virtue of paragraph 111(4)(e) of the Act, it is our view that such interest would, for the purposes of subsection 107(1.1) of the Act, be considered to have been acquired from a person who was the beneficiary in respect of the interest immediately before the acquisition thereof by the corporation.

Given the wording of subsection 87(2) of the Act, and in particular paragraph 87(2)(e) which applies "where a capital property...has been acquired by the new corporation from a predecessor corporation..." it is our view that, where a capital interest in a personal trust becomes property of an amalgamated corporation pursuant to an amalgamation which is governed by the provisions of subsection 87(1) of the Act, such interest would, for the purposes of subsection 107(1.1) of the Act, be considered to have been acquired by the amalgamated corporation from a person who was the beneficiary in respect of the interest immediately before the acquisition thereof by the amalgamated corporation.

We trust you will find our comments helpful.

Yours truly,

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