11 August 1997 External T.I. 9709335 - PRESCRIBED SHARES

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:

Are preferred shares issued to a corporation owned by the husband to capitalize wife's corporation prescibed shares pursuant to subsection 6205(2) of the Regulations?

Position: No

Reasons:

Not in accordance with Regulations

970933
XXXXXXXXXX C. Tremblay

Attention: XXXXXXXXXX

August 11, 1997

Dear Sirs:

Re: Subsection 6205(2) of the Income Tax Regulations (the "Regulations")

This is in reply to your letter of April 3, 1997, wherein you requested whether certain shares would qualify as prescribed shares in accordance with subsection 6205(2) of the Regulations.

The situation that is described appears to involve a series of actual completed transactions involving specific taxpayers; consequently, your questions should be directed to your Taxation Services Office which has the responsibility of determining the tax consequences of completed transactions and their implications to the specific taxpayers. However, we have set out some general comments which may be of some assistance.

Subsection 110.6(8) of the Act denies the capital gain exemption to individuals who have capital gains from the disposition of property in situations where a significant part of the capital gain is attributable to the fact that dividends were not paid on a share or that dividends paid on such a share in the year or in any preceding taxation year were less than 90% of the average annual rate of return thereon for the year. Section 6205 of the Regulations, however, prescribes certain shares which will not be denied the capital gain exemption by way of subsection 110.6(8). Since in the situation described, a corporation rather than an individual owns the shares in question, subsection 110.6(8) of the Act and section 6205 of the Regulations would not appear to be relevant.

We trust our comments will be of assistance to you.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch