29 October 1998 External T.I. 9821355 - WINDING-UP "BUMP"

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: Does subparagraph 88(1)(c)(vi) deny a "bump" when Target transfers property to a new subsidiary, in return for shares, in advance of the acquisition and liquidation of Target by Purchaser.

Position: If cash sale and transferred property is capital, no. If shares received by vendor, maybe.

Reasons: See below.

5-982135
XXXXXXXXXX D.A. Palamar
(613) 957-2127
Attention: XXXXXXXXXX

October 29, 1998

Dear Sir:

Re: Technical Interpretation Request - 88(1)(c)(vi)

This is in reply to your letter of August 20, 1998 wherein you requested our opinion with respect to paragraph 88(1)(c)(vi) of the Income Tax Act (the “Act”). You have outlined the hypothetical facts as follows.

Facts

It is not uncommon that a corporation (“Target”) may take certain steps to reorganize its assets prior to an acquisition of control of Target in order to ensure that its assets include shares of one or more subsidiary wholly-owned corporations which may be the subject of a future “bump” in accordance with the provisions of subsection 88(1) of the Act.

For example, assume all the shares of Target are owned by Mr. X and that Target owns a depreciable capital property (the “Property”) used to earn income from property. Target transfers the Property to a wholly-owned subsidiary corporation (“Newco”) in exchange for newly issued treasury shares of Newco pursuant to subsection 85(1) of the Act. All the shares of Target are acquired from Mr. X for cash consideration by a purchaser corporation (the “Parent”). Target is then wound up and the Parent wishes to “bump” the shares of Newco acquired on the wind-up.

Clause 88(1)(c)(vi)(B) of the Act provides that a bump will not be available with respect to the assets of a subsidiary on its winding-up where any property distributed to the parent on the winding-up or any other property acquired by any person in substitution therefor is acquired by, inter alia, a particular person (other than a specified person) that, at any time during the course of the series of transactions and before control of the subsidiary was last acquired by the parent, was a specified shareholder of the subsidiary. In circumstances where Target has a controlling shareholder (the “Controller”), Newco will be a specified shareholder of Target, because it will be related to the Controller and therefore deemed to own each share of Target owned by the Controller (paragraph (a) of the definition of “specified shareholder” in subsection 248(1)). This status will exist prior to the acquisition of control of Target. Newco will acquire the Property from Target during the course of the preliminary transactions, and will issue shares to Target in consideration for those assets. The shares of Newco will be distributed by Target on the winding-up of Target. Therefore, if the Property is considered to be acquired by Newco in substitution for the shares it issues to Target, no bump will be available in connection with the winding-up of Target.

Issue

You request our confirmation that, for purposes of clause 88(1)(c)(vi)(B) of the Act, the Property transferred to Newco by Target would not be property acquired by Newco in substitution for the Newco shares issued to Target in consideration for such property.

Your Views

In your view, Newco could only acquire the Property in substitution for other property if it already owned the other property and if it gave up the other property in order to acquire the particular property. Newco does not own unissued shares in its own capital stock. Therefore, while Target will acquire the shares of Newco in substitution for the Property that it transfers to Newco, Newco does not acquire the Property in substitution for its shares, or in substitution for any other property.

Our Views

We agree with you that, for the purposes of subparagraph 88(1)(c)(vi), in the circumstances described, the Property acquired by Newco would not ordinarily be considered to be property acquired by it in substitution for its shares issued to Target in consideration for the Property.

We would note, however, that if Mr. X had received shares of the Parent in return for his shares of Target, that the acquisition of shares of Newco by Target could cause the shares of Newco to be ineligible property within the meaning of subparagraph 88(1)(c)(vi). This is because, pursuant to sub-subclause 88(1)(c)(vi)(B)(III)1, as part of the series of transactions that includes the winding-up of Target, the shares of Newco (property distributed to the Parent on the winding-up of Target), would be acquired by a corporation (Target) of which a particular person referred to in subclause 88(1)(c)(vi)(B)(I) (Mr. X) is a specified shareholder after control of Target is acquired by the Parent.¹

The Department of Finance has been advised of this result.

In addition, nothing in this letter should be construed as providing confirmation that the shares of Newco, acquired by Target in exchange for the Property, would be considered to be capital property.

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

¹ Mr. X would be a specified shareholder of Target after the acquisition of control of Target by the Parent if he received shares of the Parent in exchange for his Target shares that amounted to at least 10% of the issued shares of any class of shares of the Parent.

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