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 shares issued to shareholders on a "reverse takeover" substituted property for the purposes of clauses 88(1)(c)(vi) and 88(1)(c.3)(ii).
Position: No.
Reasons: In the situation described only 6o% of the value of the shares issued to shareholders of the target is attributable to property of the target.
5-972743
XXXXXXXXXX David Palamar
(613) 957-2127
Attention: XXXXXXXXXX
August 7, 1998
Dear Sir:
Re: Technical Interpretation Request - 88(1)(c.3)
This is in reply to your letter of October 7, 1997 wherein you requested our opinion with respect to paragraph 88(1)(c.3) of the Income Tax Act (the “Act”). You have outlined the relevant facts as follows.
Public company A (“Aco”) acquires all the stock of public company B (“Bco”) on a share-for-share exchange where the only consideration issued by Aco is ordinary common shares of its capital stock. Following the exchange, the former shareholders of Bco own more than 50% of the outstanding common shares of Aco sixty percent of the value of which Aco shares is attributable to property of Bco.
Subsequently, Aco desires to wind up Bco and “bump” the tax cost of certain of Bco’s property pursuant to paragraphs 88(1)(c) and (d) of the Act.
Interpretation Requested
You have requested our comments as to whether the property of Bco, distributed to Aco on the wind-up of Bco, would be “ineligible property” within the meaning of subparagraph 88(1)(c)(vi). More specifically, your question is whether the shares of Aco received by the Bco shareholders would be “property acquired by any person in substitution for particular property ...” , within the meaning of clause 88(1)(c)(vi)(B) (“substituted property”), by virtue of subparagraph 88(1)(c.3)(ii), being property the fair market value of which is determinable primarily by reference to the fair market value of the particular property or properties (i.e. the property of the subsidiary, Bco).
Your Views
In your view, in this situation where 60% of the fair market value of all the parent’s shares is attributable to property of the subsidiary the common shares of the parent should not be considered to be substituted property pursuant to subparagraph 88(1)(c.3)(ii).
In support of this conclusion you cite the following excerpt from the Department of Finance technical notes describing examples of property falling within subparagraph 88(1)(c.3)(ii).
An example of property the fair market value of which is determinable primarily by reference to the fair market value of a particular property would be a share or debt the terms of which provide for a value that is dependent upon or tracks the proceeds from the disposition of the particular property. In addition, in a situation where at the end of the series the vendor holds a majority of the shares of a corporation substantially all of the value of which is attributable to property distributed on the winding-up, the value of those shares will be considered to be determinable primarily by reference to the fair market value of that property.
Our Views
We agree with you that, in the situation described, the shares of Aco would not be considered to be substituted property as substantially all of the value of those shares would not be attributable to property distributed on the winding-up (i.e. property of Bco).
The above comments represent our general views with respect to the subject matter of your letter and are provided in accordance with our policy set out in paragraph 22 of our Information Circular 70-6R3.
Yours truly,
for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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