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:
This is in reply to your letter of October 31, 1980 wherein you request our opinion concerning the application of the above-noted section of the Act in the following situation.
You submit the following facts:
- 1. Company A owns all the outstanding shares of Companies B and D. Company B owns all the outstanding shares of Company C. All four corporations are resident in Canada. The adjusted cost base of the shares of Company C is $500,000 and their fair market value is $1,000,000.
- 2. Company B is to be sold to third parties dealing at arm's length with Company A provided certain assets are removed from Company B first; namely, the shares of Company C and certain indebtedness owing to Company B.
In order to achieve the foregoing, you propose the following:
- 1. Company B sells the shares of Company C to Company D for preferred shares of Company D having a paid-up capital and fair market value of $500,000. The parties will elect pursuant to subsection 85(1) of the Income Tax Act to transfer the shares for a consideration equal to $500,000.
- 2. Company B will declare dividends in kind to Company A consisting of the preferred shares of Company D and the indebtedness referred to above.
- 3. Following the dividend the shares of Company B will be sold to third parties.
It is our opinion that proposed paragraph 55(3)(b) does not apply to the above situation as "each type of property" is not necessarily distributed. Section 55 may apply to the transaction if A acquired the shares of B in such a manner that the transfer of the shares of C to D for an amount of consideration less than fair market value results in A incurring a capital loss or a reduction in capital gain on the sale of the shares of B to a third party, caused by a stripping of the value of B's assets due to the subsection 85(1) transfer.
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© Her Majesty the Queen in Right of Canada, 1980
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© Sa Majesté la Reine du Chef du Canada, 1980
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