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 subsection 15(1) of the Act would apply in a situation where the capital of a wholly-owned subsidiary is reorganized under section 86 in a manner such that the provisions of subsection 86(2) does not apply because of the exception with respect to "wholly-owned subsidiaries".
Position:
NO.
Reasons:
Implicit in our various published roundtable questions regarding the inadequate consideration rules in rollovers (eg. 51(2), 86(2), 85(1)(e.2)) is that 15(1) would also not be applied in a "wholly-owned" situation.
970821
XXXXXXXXXX J. Wilson
Attention: XXXXXXXXXX
May 2, 1997
Dear Sirs:
Re: Subsections 15(1) and 86(2) of the Income Tax Act ("Act")
This is in reply to your letter dated March 11, 1997, in which you requested our comments concerning whether subsection 15(1) of the Act would apply in a situation where the capital of a wholly-owned subsidiary is reorganized in a manner such that the provisions of section 86 are applicable. More particularly, you are considering the following scenario:
A taxable Canadian corporation ("Parent") owns all of the outstanding shares of another taxable Canadian corporation ("Subco"). Subco has two class of shares outstanding, common shares and special shares. The special shares were at one time held by third parties but were all acquired by the Parent a number of years ago. Parent would like to simplify the balance sheet of Subco and proposes to convert the special shares of Subco into common shares of Subco in a reorganization of capital to which the provisions of subsection 86(1) would apply. Neither the value of the outstanding common shares of Subco nor the value of the outstanding special shares of Subco can be determined with any certainty. Estimating the values would require a considerable effort and would occasion considerable cost. There is no business reason to undertake the valuation exercise at this time. Rather than be concerned with actual values, it is proposed that the special shares be converted into a nominal number of common shares of the same class as the currently issued and outstanding common shares. The common shares received on the conversion would have a value which is considerably less than the value of the special shares converted. On the reorganization the value of the existing common shares of Subco would be increased such that immediately following the reorganization the aggregate value of all of the issued and outstanding common shares of Subco would be equal to the aggregate value, immediately before the reorganization, of the common and special shares of Subco.
It appears that the interpretation you seek relates to a proposed transaction to be undertaken by a specific taxpayer and, therefore, we bring to your attention Information Circular 70-6R3 dated December 30, 1996 issued by Revenue Canada, 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. If you wish to obtain an advance income tax ruling for a particular taxpayer with respect to specific transactions which are contemplated, a written request for an advance income tax ruling can be submitted in accordance with the Information Circular. Nevertheless, we can offer the following general comments.
In the circumstances described above the Department would generally not consider the application of subsection 15(1) of the Act. As stated in Question #13, Revenue Canada Forum, 1996 Corporate Management Tax Conference, page 24:16, subsection 86(2) of the Act would also not apply in this situation.
The foregoing comments represent our general views with respect to the subject matter of your letter. As indicated in paragraph 22 of the aforementioned Information Circular this is not an advance income tax ruling and is therefore not binding on Revenue Canada, Customs, Excise & Taxation.
Yours truly,
for Director
Reorganizations and Foreign Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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