28 August 1989 Income Tax Severed Letter AC57840 - Transfer of Shares to a Corporation

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.

5-7480
                                              F. Ahmed
                                              (613) 957-2092

Dear Sirs:

Re: Subsections 85(1) and 86(1) of the Income Tax Act (the "Act")

This is in response to your request for a technical interpretation contained in your letter of January 26, 1989, wherein you requested our views as to whether the provisions of subsection 85(i) of the Act would apply where a taxpayer disposes of shares of a taxable Canadian corporation to that corporation for consideration which includes shares of the capital stock of the corporation and the taxpayer and the corporation jointly elect in prescribed form to have the provisions of subsection 85(1) of the Act apply thereto.

A second issue on which you requested our opinion is whether a taxpayer would be considered to have disposed of a share of the capital stock of a corporation in the course of a reorganization of capital of the corporation where such taxpayer exchanges all of his shares of a particular class for shares of a different class of the corporation (the "exchanged shares") that have previously been authorized. In this connection, you ask if it makes any difference whether the exchanged shares were authorized shortly before and in anticipation of the exchange by the filing of articles of amendment or if they had been authorized before the exchange was contemplated.

Opinions

In our view, the provisions of subsection 85(1) of the Act apply in the case where a taxpayer transfers shares of a taxable Canadian corporation to that corporation and receives newly issued shares of the corporation as consideration therefore provided that the transferor and transferee file the prescribed form within the time limits specified in subsection 85(6). Wether a share is disposed of in the course of a reorganization of capital of a corporation is a question of fact which is dependent upon all of the relevant circumstances. In general, one would expect that where the exchanged shares were authorized in anticipation of and shortly before the exchange, the shares disposed of on the exchange would be disposed of in the course of a reorganization of capital of the corporation. The fact that the exchanged shares would be authorized before the exchange was contemplated would, in our view, make little difference as to whether the shares disposed of on the exchange would be disposed of in the course of a reorganization of capital, unless other factors dictated otherwise.

The above comments represent only an expression of opinion which is not binding on the Department in accordance with paragraph 24 of Information Circular 70-6R. We apologize for the delay in responding to your letter.

Yours truly,

for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch