18 August 1989 Income Tax Severed Letter AC57892 - Exchange of Shares

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.

5-7892
                                                 H.K. Tilak
                                                 (613) 957-2122

Dear Sirs:

Re: Subsection 85(2) of the Income Tax Act

We are writing in response to your letter dated April 6, 1989 in which you requested that we confirm the Department's position regarding the application of subsection 85(2) of the Income Tax Act (the Act) as set out in the Department's reply to Question 48 of the Revenue Canada Round Table at the Thirty-ninth Tax Conference of the Canadian Tax Foundation in November, 1987, as follows:

"Exchange of Shares

           Where the only property of a partnership is shares of
           a corporation and the partnership disposes of those
           shares to the issuer in exchange for other shares of
           the issuer that are identical to the exchanged shares,
           has there been a disposition of property by the
           partnership for the purposes of subsection 85(2) of
           the Act?

Department's Position

           While the legal implications of such a transfer may
           vary according to individual situations, in the
           circumstances described the transfer of shares is
           considered to constitute a disposition of partnership
           property to which subsection 85(2) applies."

We confirm that the Department's view, as expressed above, remains unchanged.

You have asked whether, in such circumstances, the amount that the issuer corporation and all the members of the partnership have agreed upon in their joint election under subsection 85(2) of the Act is the amount paid by the corporation, for the purposes of paragraph 84(3)(a) of the Act, on the redemption, acquisition or cancellation of the shares so transferred by the partnership to the corporation. It is the Department's view that, pursuant to paragraph 84(5)(d) of the Act, the amount paid by the corporation on the redemption, acquisition or cancellation of the shares so transferred to the corporation is, for the purposes of paragraph 84(3)(a) of the Act, the amount by which the paid-up capital of the class of shares is increased by virtue of the issue of the other shares as consideration for the shares so transferred to the corporation.

You have also asked whether, in such circumstances, subsection 245(2) of the Act would apply to deny any tax benefit that may result under the rules set out in subsection 85(3) of the Act if subsection 85(2) applied to the disposition of the shares to the issuer corporation, the affairs of the partnership were wound `up within 60 days after the disposition and, immediately before such winding-up, there was no partnership property other than money or property received from the corporation as consideration for the disposition. Subject to subsection 245(4) of the Act, subsection 245(2) of the Act will apply to deny a tax benefit that results from an avoidance transaction or from a series of transactions that includes an avoidance transaction. Whether or not the disposition of shares (to which subsection 85(2) of the Act applies) or the winding up of the partnership's affairs (to which subsection 85(3) of the Act applies) is, or is part of a series of transactions that includes, an avoidance transaction (within the meaning of subsection 245(3) of the Act) is a question of fact that can only be determined by reference to the facts and circumstances of a particular situation. The Department is not prepared to express an opinion on that question of fact except in the context of an Advance Income Tax Ruling and provided that all of the relevant facts and circumstances are disclosed.

The foregoing represent our general views with respect to the subject matter of your letter. The facts of a particular situation may lead to a different conclusion. The foregoing opinions are not rulings and, in accordance with the guidelines set out in Information Circular 70-6R dated December 18, 1978, are not binding on the Department.

Yours truly,

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