13 June 1988 Income Tax Severed Letter RCT 3-1863 F

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.

Dear Sirs:

RE:     XXX

This is in reply to your letter of May 20, 1988 wherein you requested an advance income tax ruling in respect of the above-named taxpayer.

The information provided in your request is insufficient for us to proceed with the ruling requested at this time. We do, however, wish to provide the following comments in respect of the information which was submitted.

You have indicated in your ruling request that the taxpayer, XXX wishes to claim a deduction under subsection 110.6(3) of the Income Tax Act (the "Act") in respect of the sale of shares of a qualified small business corporation. The definition of a "qualified small business corporation share" is contained in the draft legislation to implement the income tax reform measures which was released by the Department of Finance on April 13, 1988.

As we understand the proposed transactions described in the ruling request, the XXX assets currently owned by XXX will be transferred to XXX. An election will be filed under subsection 85(1) of the Act to transfer the assets at their cost for tax purposes. The consideration to be received by XXX According to the schedule provided in your request, the consideration to be received is significantly less than the current fair market value of the property being transferred. After the transfer there would be a sale of shares of XXX by XXX intends to claim the capital gains deduction under subsection 110.6(3) of the Act in respect of the capital gain which would be realized from this sale.

We draw your attention to paragraph 110.6(7)(b) of the Act which appears to be relevant to the proposed transaction. This paragraph operates to deny the capital gains deduction to an individual where a capital gain has been realized from the disposition of property as part of a series of transactions in which any property is acquired by a corporation for consideration that does not approximate its fair market vallue at the time of acquisition. It should be noted that the draft legislation to implement the income tax reform measures proposes to amend this provision to apply in situations where the consideration received is significantly less than the fair market value of the property at the time of acquisition. Since an acquisition of property for consideration which is significantly less than fair market value is being contemplated by XXX as part of the series of proposed transactions, it is our view that XXX would not be entitled to claim the capital gains deduction under subsection 110.6(3) of the Act in respect of the sale of shares of XXX.

The foregoing comments are opinions and not rulings, as explained in paragraph 24 of Information Circular 70-6R.

We realize that in view of our negative opinion concerning the availability of the capital gains deduction, you may choose not to resubmit your application for an advance income tax ruling. Should you decide to submit an amended ruling application, we wish to draw your attention to the procedures for requesting an advance income tax ruling as outlined in paragraphs 15 and 16 of Information Circular 70-6R, a copy of which is attached.

In view of the comments herein, our file on your advance income tax ruling request has been closed and your deposit will be returned under separate cover. A new file will be opened should you decide to resubmit an advance income tax ruling request conforming to the requirements of Information Circular 70-6R.