5 June 1987 Income Tax Severed Letter RCT 5-2939 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:     Subsection 85(1)(e.2) of the Income Tax Act, Canada (the "Act")

This is in reply to your letter of February 12, 1987, in which you asked for our opinions concerning the application of subsection 85(1)(e.2) of the Act in certain hypothetical situations.

In the example you described, an individual owns 100% of the shares of Company A, a Canadian-controlled private corporation which carries on an active business and holds assets not used in an active business sufficient to disqualify it from being a small business corporation as defined in subsection 248(1) of the Act. The individual incorporates Newco, a taxable Canadian corporation, so that he owns 100% of its issued shares and causes Company A to dispose of all its active business assets to Newco utilizing the provisions of subsection 85(1) of the Act, for consideration less than the fair market value of the assets disposed. The individual then transfers a portion of his shares in Newco to his child, utilizing the provisions of subsection 73(5) of the Act to reduce the capital gain on the transfer.

Comments

In fact situations such as that described above, Revenue Canada is prepared to consider providing advance income tax rulings that the provisions of subsections 15(1), 55(1), 56(2), 245(2), 247(1) and paragraph 85(1)(e.2) of the Act would not apply, provided that the fair market value of the consideration on the subsection 85(1) transfer equals both the principal amount of the debt and the cost amounts of the assets transferred, and provided further that the property transferred was acquired by Company A after the individual acquired the shares of Company A. If the property transferred was owned by Company A when the individual acquired the shares of Company A, favourable rulings would be given only if the consideration referred to was equal to the fair market value of the property transferred at the time the individual acquired the shares of Company A. Similarly, if the adjusted cost base of the property to be transferred is based on a V-day valuation, then the V-day value of the property to be transferred would usually be the appropriate minimum amount of the consideration.

These comments may not be appropriate or complete when applied to any particular situation, and therefore should not be considered as having general application. We also caution that the above practice is currently under review and may be discontinued. Any taxpayer considering a transaction of the type described and seeking to rely on the position explained above should apply for an advance income tax ruling.

The provisions of paragraph 110.6(7)(b) of the Act will apply to deny the capital gains exemption on a future sale of shares, where this type of arrangement is part of a series of transactions or events including the share sale. For this purpose, a series of transactions or events has the extended meaning assigned by subsection 248(10) of the Act.

The comments above apply equally to situations which are the same as the one described except for the fact that Newco is a presently incorporated inactive company, and to situations which are the same as the one described except for the fact that a husband and wife each own 50% of Company A and Newco.

General

Our responses represent our current general opinions on the matters you have raised. An examination of the facts of a particular case might lead to conclusions which differ from those presented here. In particular we are concerned that where shares are transferred to a child as is the case in your example, the child may be the agent of the parent, in which case a subsequent gain on a disposition of the shares transferred to the child would be subject to tax in the hands of the parent. Conclusions on the question of agency can only be reached upon the examination of the specific facts of real cases.

Our opinions are not rulings and are therefore not binding on Revenue Canada, Taxation as explained in paragraph 24 of Information Circular 70-6R, published on December 18, 1978.