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 XXX:
This is in reply to a letter dated April 29, 1981 in which XXX then of your firm expressed a concern about the application of subsection 55 and paragraph 55(3)(b) of the Income Tax Act (the Act) in the following hypothetical situation:
1. Corporation A is owned 80% by A and 20% by B, A's brother. A wants to transfer 29% of his shares in company A to B, so as to leave A with 51% and B with 49%. The 29% of shares in company A to be transferred will have a paid-up capital of approximately $1,500, an adjusted cost base of approximately $100,000, and a fair market value of approximately $600,000.
2. B holds interests in several other corporations which it is proposed be sold to A as consideration for B's purchase of shares in company A. Among the possible share interests which might be utilized for this purpose are the following:
a) Company B, of which B owns approximately 13% of the shares (having an adjusted cost base of approximately $100,000 and a fair market value of approximately $200,000) and A already owns 14%;
b) Company C, of which A and B each own 25% of the outstanding shares, each 25% interest having an adjusted cost base of $50,000 and a fair market value of $100,000;
c) Company D, of which B owns 25% of the issued shares having an adjusted cost base of $100,000 and a fair market value of $200,000; and
d) Company E, of which A and B each own 50%, each 50% interest having an adjusted cost base of $80,000 and a fair market value of $100,000.
3. Companies A, B, and D carry on active businesses, while Company C and E earn income of a more passive nature from real estate and other investments.
4. A will roll his 29% interest in company A to be sold into a new holding company (Holdco) under section 85, while B will do the same with respect to his shares in companies B, C, D, and E. Each of them will take back shares with a paid-up capital equal to the paid-up capital of the shares rolled in, and will use as their elected amount the adjusted cost base of the shares rolled in.
5. B will then roll his shares of Holdco into another new company (Newco) in exchange for shares of Newco with a redemption and retraction amount equal to the fair market value of the Holdco shares rolled in and a paid-up capital equal to the paid-up capital of those shares. Care will be taken that Holdco and Newco would be associated, perhaps by issuing one extra nonparticipating voting share of Holdco to Newco for an appropriate consideration.
6. Holdco will roll the company A shares into Newco in exchange for Class C shares of Newco redeemable at the fair market value of the company A shares and with a paid-up capital equal to the adjusted cost base of the company A shares.
7. Newco will redeem the Class C shares held by Holdco, giving rise to a deemed dividend, and Holdco will repurchase the shares acquired by Newco by way of a rollover from B, again giving rise to a deemed dividend.
8. In the end, A will own 100% of Holdco, which in turn will own shares in companies B, C, D, and E, while B will own 100% of Newco, which in turn will own a 29% interest in company A.
The Department is of the view that the transactions described above are barter transactions and it is our opinion that the incorporation of Holdco and the rolling of shares into Holdco by A and B are related transactions in contemplation of the series transactions or events and are, therefore, included in the series of transactions or events. As Holdco did not exist and did not have any assets immediately before the series of transactions or events, the deemed dividends described in paragraph 7 above will not be exempted from the application of subsection 55(2) of the Act by paragraph 55(3)(b) of the Act.
In addition, with respect to the shareholdings of Holdco in companies A, B, C, D, E, it is our opinion that the shares of companies A, B, and D would be considered business type assets and the shares of companies C and E could be considered investment type assets, rather than considering all the shares of those companies as one type of asset (refer to paragraph 3 above).
This opinion is the same as that given to you verbally in September 1981 and we trust that this information will be of assistance to you.
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 1982
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 1982
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