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:
What is the order of disposition of identical shares, some acquired under option and some not, for the purposes of section 7?
Position:
Prorata distribution out of the various pools
Reasons:
Our general position as discussed in file 981091 has application.
XXXXXXXXXX 990956
W. C. Harding
Attention: XXXXXXXXXX
October 25, 1999
Dear Sirs:
Re Subsection 7(1.3) and 7(1.5) of the Income Tax Act (the "Act")
This is in reply to your letter of June 3, 1999, in which you requested our opinion on the application of subsections 7(1.3) and 7(1.5) of the Act in certain situations.
As stated in your letter, if subsection 7(1.5) applies to a situation where a taxpayer receives new shares in exchange for old shares, the taxpayer is deemed not to have acquired the new shares and the new shares are deemed to be the same shares as and a continuation of the old shares. Furthermore, subsection 7(1.5) applies for the purposes of section 7 and therefore applies for the purposes of subsection 7(1.3). Accordingly it would seem that for the purposes of subsection 7(1.3) any new shares acquired in a situation to which subsection 7(1.5) applies would not be identical to any such new shares otherwise acquired.
For example, assume a taxpayer holding class A shares of a corporation ("non-option shares") exercises a subsection 7(1.1) option to acquire class B shares of the same corporation ("option shares") and subsequently exchanges both the option and non-option shares for common shares. Subsection 7(1.5) will apply only to the exchange of option shares. As a consequence, it appears that the common shares acquired in exchange for the option shares will be deemed to be the same as the option shares and will not be identical to the common shares acquired in exchange for the non-option shares (the "A pool shares").
In our opinion the provisions of subsection 7(1.3) will not have application to order any disposition of one type of common shares over the other because the A pool shares will not be identical to the option shares. However, subsection 7(1.3) could have application to order the disposition of option shares held if there were shares acquired under more than one subsection 7(1.1) option. Nevertheless, we do recognize that, since both types of shares are otherwise identical common shares, it is still not possible to specifically identify which common shares are, in fact, disposed of. Therefore, consistent with our position in similar situations on the application of section 7, we are of the view that it is appropriate to assume there is a pro rata disposition of both types of shares. Please note that in providing our answer, we have presumed section 51 would apply to the exchange of the Class A shares but have not otherwise considered the application of any other provisions of the Act other than those discussed above.
At the 1999 Canadian Tax Conference the Department concluded that a taxpayer who owns CCPC shares may transfer options for non-CCPC shares of the same corporation to a non-arm's length taxpayer in order to avoid the application of subsections 7(1.3) and 47(1). In our opinion a similar conclusion could be reached where non-identical option shares are transferred to a non-arm's length person and segregated from non-option shares prior to an event which causes them to become identical properties. The avoidance of these tax results in either situation would not result in a misuse of the provisions of the Act or an abuse having regard to the provisions of the Act read as a whole. We trust this reply will be satisfactory to you.
Yours truly,
P. Spice
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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