6 November 1997 External T.I. 9728755 - BENEFIT CONFERRED ON ISSUANCE OF 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:

Whether subsection 15(1) would apply in a situation where a shareholder exchanges his shares in a corporation pursuant to 51(1) or 86(1) for other shares of the corporation with a fair market value in excess of the fair market value of the original shares. The corporation has one other shareholder and the shareholders are unrelated.

Position:

Yes and paragraph 69(1)(b) could also apply to deem that the other shareholder has disposed of part of his economic interest.

Reasons:

Benefit would include any benefit or advantage conferred on a shareholder.

5-972875
XXXXXXXXXX J. Teixeira

November 6, 1997

Dear Madam:

Re: Subsection 15(1) - Shareholder Benefits

This is in reply to your letter of October 24, 1997 wherein you requested our opinion on the application of subsection 15(1) of the Income Tax Act (Canada) (the "Act") to the following situation.

An individual shareholder ("A") acquired 20 preferred shares in a Canadian-controlled private corporation ("Opco") in 1988 for $20. These preferred shares are non-voting, entitled to non-cumulative dividends at a fixed rate and non-participating. The adjusted cost base ("ACB") to A, the paid-up capital ("PUC") and fair market value of these preferred shares is $20. A holds no other shares in Opco.

Another individual ("B"), who is unrelated to A, is the only other shareholder of Opco and he holds 80 voting, participating common shares. The common shares held by B have a fair market value of $1,000 and ACB and PUC of $80.

A exchanges his 20 preferred shares in Opco for no consideration other than 20 common shares in Opco pursuant to subsection 51(1) or 86(1) of the Act.

Comments

It appears that the interpretation you seek relates to specific transactions with identifiable taxpayers, therefore, we refer you to Information Circular 70-6R3 dated December 31, 1996. Confirmation with respect to proposed transactions 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 in respect of specific proposed transactions, a request for an advance ruling can be submitted in accordance with the Information Circular. We can, however, provide the following general comments.

The word "benefit" in subsection 15(1) is broad enough to include more than a payment by the corporation to a shareholder otherwise than pursuant to a bona fide business transaction or an appropriation of property in any manner whatever to, or for, the benefit of, a shareholder. It would include any benefit or advantage conferred on a shareholder by a corporation. In the case where shares with a fair market value of $20 are exchanged for other shares with a fair market value of $200, the corporation would have conferred a benefit of $180 on the shareholder at the time the shares were issued to the shareholder.

In addition, paragraph 69(1)(b) could be applied, in the case where A and B do not deal at arm's length with one another, to deem B to have received proceeds of disposition equal to the fair market value of B's economic interest given up in Opco.

The above comments are not rulings and, in accordance with the practice referred to in Information Circular 70-6R3 dated December 30, 1996, are not binding on Revenue Canada.

Yours truly,

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