16 November 1998 External T.I. 9820135 - ELECTION FOR ECP OWNED ON FEB 22, 1994

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.

	5-982013
XXXXXXXXXX 								J. Teixeira
(613) 957-2095
November 16, 1998

Dear Sir:

Re: Transfer of eligible capital property and redemption of shares received as consideration

This is in reply to your letter of July 28, 1998 in which you requested our comments on the redemption of shares issued by a corporation in consideration for the transfer of eligible capital property, in respect of a business of an individual, pursuant to subsection 85(1) of the Income Tax Act. The transfer of the eligible capital property occurred at the same time as the transfer of the individual's business and all its assets and liabilities. The individual had elected, prior to the transfer of his business to the corporation, in prescribed form to have the provisions of subsection 110.6(19) apply in respect to the goodwill of this business.

The particular circumstances outlined in your letter appear to be actual transactions involving specific taxpayers. As mentioned in Information Circular 70-6R3 dated December 30, 1996, advancenm income tax rulings are not provided on transactions that are already completed or on series of transactions that are significantly advanced. The tax consequences of completed transactions are best determined by our relevant Tax Services Office in the course of a tax audit. However, we are prepared to provide you with the following general comments.

Our Comments

Paragraph 110.6(19)(b) provides that an election can be made in respect of all the eligible capital property owned on February 22, 1994 by an individual elector and the amount determined under subparagraph 14(1)(a)(v) in such circumstances is deemed to be a taxable capital gain of the elector. The deemed taxable capital gain would generally result in the creation of an "exempt gains balance" as defined in subsection 14(5) in respect of the elector's business. The elector may claim all or a portion of his "exempt gains balance" as variable D in the formula described in subparagraph 14(1)(a)(v) to reduce an amount to be included in income on the disposition of an eligible capital property for which a paragraph 110.6(19)(b) election had previously been made. Therefore, on the transfer of all the eligible capital property of the individual's business to a corporation pursuant to subsection 85(1), the transferor may elect an amount that is equal to the amount designated in his 110.6(19)(b) election and then reduce the amount to be included in income by his "exempt gains balance".

In the case where the individual does not deal at arm's length with the corporation, subsection 14(3) will apply to deem the eligible capital expenditure of the corporation to be 4/3 of

(a) the amount determined by the transferor as the eligible capital amount from the disposition of the property

minus

(b) the total of all amounts that may reasonably be considered to have been claimed as a section 110.6 capital gains deduction by the transferor or any person with whom the transferor was not dealing at arm's length in respect of the disposition of the property by the transferor, or any other disposition of the property before that time.

On the redemption of the shares issued in consideration for the transfer of the eligible capital property, the amount paid by the corporation on the redemption of those shares in excess of the amount of the paid-up capital in respect of those shares immediately before the redemption is deemed by subsection 84(3) to have been a dividend received by the holder of those shares.

The comments expressed are not advance income tax rulings and are not considered binding on the Department, in respect of any taxpayer, in accordance with paragraph 22 of Information Circular 70-6R3 dated December 30, 1996.

Yours truly,

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

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