4 January 1990 Income Tax Severed Letter AC592625 - Prescribed Share for Capital Gains Deduction Purposes

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.

19(1)                                        H. K. Tilak
                                             (613) 957-2122

January 4, 1990

Dear Sirs:

Re: Subsection 6205(2) of the Income Tax Regulations

We are writing in response to your letter dated December 13, 1989 in which you asked for our opinion regarding the application of certain provisions of the Income Tax Act (the "Act") and the Income Tax Regulations (the "Regulations") to the hypothetical situation described below.

In the hypothetical situation you describe, 75% of the common shares of a corporation ("OPCO") are held by Mr. A and the other 25% of the common shares of OPCO are held by Mr. B. The common shares of OPCO are capital property of Mr. A and Mr. B within the meaning of paragraph 54(b) of the Act. In the course of a reorganization of the capital of OPCO to which section 86 of the Act applies, Mr. A and Mr. B dispose of all of their common shares of OPCO to OPCO and, as sole consideration therefor, Mr. A and Mr. B receive preferred shares of OPCO from OPCO, in each case, having a fair market value equal to the fair market value of the common shares of OPCO so disposed of. Such reorganization of the capital of OPCO and the issue of preferred shares by opco is part of an arrangement that involves the issue of common shares of OPCO to Mr. A and to Mr. C who are employees of OPCO. The main purpose of such arrangement is to permit any increase in the value of OPCO to accrue to such common shares. For the purposes of the Act, Mr. A, Mr. B and Mr. C deal at arm's length with each other. For the purposes of subsections 110.6(8) and (9) of the Act, such common shares of OPCO are, at the time of their issue, prescribed shares pursuant to subsection 6205(l) of the Regulations and the preferred shares of OPCO will, for so long as those shares are owned by the person to whom they were issued or by a spouse or parent of such person, be prescribed shares pursuant to paragraph 6205(2)(b) of the Regulations.

24(1)

You have asked whether, if a corporation that is wholly-owned by Mr. A ("HOLDCO") were to, thereafter, acquire the preferred shares of OPCO from Mr. A (as a result of a disposition of such shares to which the rules in subsection 85(l) of the Act applied) or from Mr. B (for consideration comprising a promissory note), the preferred shares of OPCO so acquired by HOLDCO would cease to be prescribed shares pursuant to paragraph 6205(2)(b) of the Regulations.

It is the Department's opinion that a share that was issued to a person and that would not, for the purposes of subsections 110.6(8) and (9) of the Act, be a prescribed share at a particular time except Pursuant to paragraph 6205(2)(b) of the Regulations will not be a prescribed share at the particular time for such purposes if the share is owned, at that time, by any person, other than the person to whom it vas issued or a spouse or child of that person.

In the hypothetical situation you describe, Mr. A would not be considered to own any property owned by HOLDCO notwithstanding that Mr. A is the sole shareholder of HOLDCO. Hence, the preferred shares of OPCO acquired by HOLDCO from either Mr. A or Mr. B would not be prescribed shares pursuant to paragraph 6205(2)(b) of the Regulations while such shares are owned by HOLDCO.

These comments represent our general views with respect to the subject matter of your letter and are expressed in accordance with the guidelines set out in Information Circular 70-6R dated December 18, 1978. The facts of a particular situation may lead to a different conclusion.

Yours truly,

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