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 ISSUE:
The issue concerns the transitional rules described in Chapter 19 of the Statutes of Canada 1998 (hereinafter, “Chapter 19”) that apply with respect to revised subsections 112(3) to (3.32) of the Income Tax Act. Subsection 131(12) of Chapter 19 provides that, for purposes of paragraph 131(11)(b) of Chapter 19, a share of the capital stock of a corporation that is acquired in exchange for another share in a transaction to which section 51, 85, 86 or 87 of the Income Tax Act applies will be deemed to be the same share as the other share.
The question is whether such an exchanged share can itself be exchanged for another share and continue to obtain the grandfathering protection that was afforded the original share under paragraph 131(11)(b) of Chapter 19.
Position:
Yes.
Reasons:
Subsection 131(12) of Chapter 19 states that it is “for the purposes of paragraph (11)(b) and this subsection” [underlining added]. The December 1997 Explanatory Notes of the Department of Finance stated that this provision would be modified to “clarify that the transitional rule will continue to be available where there is a succession of share transfers, conversions, reorganizations or amalgamations.” This was accommodated by adding the words “and this subsection.” It is noted that these words do not appear in CCH’s published version of the Income Tax Act.
XXXXXXXXXX J.D. Brooks
982031
Attention: XXXXXXXXXX
April 19, 1999
Dear XXXXXXXXXX:
This is in reply to your letter of August 9, 1998 in which you requested our views on the interpretation of transitional rules that apply with respect to subsections 112(3) to (3.32) of the Income Tax Act (the “Act”). You observed that subsection 131(12) of Chapter 19 of the Statutes of Canada 1998 (hereinafter referred to as “Chapter 19”) provides that a share (the “exchanged share”) of the capital stock of a corporation acquired in exchange for another share (the “original share”) in a transaction to which section 51, 85, 86 or 87 of the Act applies is deemed to be the same share as the original share. You queried whether this provision would enable such an exchanged share to be exchanged itself for another share.
The text of subsection 131(12) of Chapter 19 reads as follows:
For the purposes of paragraph (11)(b) and this subsection, a share of the capital stock of a corporation acquired in exchange for another share in a transaction to which section 51, 85, 86 or 87 of the Act applies is deemed to be the same share as the other share. [underlining added]
Accordingly, it is our view that an exchanged share may be exchanged itself for another share (the “second-exchanged share”) with the result that the second-exchanged share will be deemed to be the original share for purposes of paragraph (11)(b) of Chapter 19. Thus, any grandfathering protection provided by paragraph (11)(b) of Chapter 19 to the original share will continue to be provided to the second-exchanged share.
We trust our comments will be of assistance to you.
Yours truly,
T. Murphy
Manager
Trusts Section
Resources, Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch
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