3 June 1987 Income Tax Severed Letter RCT 5-3192

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.

Attention: XXX.

Dear Sirs:

Re: Section 84.1 and Subsection 247(1) of the Income Tax Act (the "Act")

This is in response to your letter of March 31, 1987 in which you requested our opinion on the application of section 84.1 and subsection 247(1) of the Act in the hypothetical situation described below:

• 1. A taxpayer (Mr. X) died in 1985.
• 2. At the time of his death Mr. X owned all of the shares of a corporation (X Co.) which held cash and capital property (land and building) rented to long term tenants.
• 3. X Co. was incorporated in 1976.
• 4. Mr. X's cost of the shares was $2, his subscription price for the shares in 1976.
• 5. The fair market value of the shares he held at date of death was $250,000.
• 6. The deemed disposition on death resulted in a taxable capital gain of $124,999 being added to Mr. X's personal income on his final return for 1985.
• 7. The administrator of the estate claimed a $10,000 deduction in 1985 pursuant to section 110.6 in respect of the gain on the shares of X Co.
• 8. The last will and testament of Mr. X is being contested.
• 9. The administrator is considered by you not to deal at arm's length with any of the beneficiaries.
• 10. X Co. cannot be wound-up before there is a court approved agreement or judgement as to how beneficiaries will benefit from the assets of the estate including the shares of X Co.
• 11. Once a settlement has been reached the plan is to form a holding company (Y Co.) in which the beneficiaries will be common shareholders to the extent that it is finally determined that they participate in the estate.
• 12. The administrator will sell the shares of X Co. to Y Co. and receive as consideration a promissory note for $229,998 and preferred shares with a redemption value equal to the difference between the current fair market value of X Co. and the promissory note, but a total par value and paid-up capital of $2. An election will be made under the provisions of subsection 85(1). The elected amount will be $250,000 and there will be a price adjustment agreement to require that total consideration equal current fair market value.
• 13. X Co. will be wound-up into Y Co. and rules in subsection 88(1) should apply.
• 14. The administrator will realize part or all of the promissory note in cash available in Y Co. as a result of the wind-up of X Co.
• 15. The administrator will distribute cash and preferred shares of Y Co. to the beneficiaries.
• 16. The land and building rented to long time tenants will continue to be owned by Y Co.

You have asked whether the Department would apply subsection 247(1) of the Act to a situation, such as the one above, which clearly falls within section 84.1.

You have also asked whether our response would be affected if X Co. was incorporated in 1966, the shares cost $2 and had a V-Day value of $100,000, the promissory note described in item 12. above was reduced by $99,998 to $130,000, and the redemption value of the preferred shares was increased by $99,998 to $120,000.

We provide the following general comments.

If an individual disposes of shares to a corporation with which he does not deal at arm's length in a transaction or series of transactions to which section 84.1 applies, the Department normally will not apply subsection 247(1).

There are no factors in the two scenarios you have given which necessarily lead us to the conclusion that subsection 247(1) of the Act should be applied. However, as that subsection involves a tax avoidance purpose test, a more definitive response can be made only on a rulings basis where all of the relevant facts and proposed transactions of a particular case are known.

Regarding the application of section 84.1 we have the following comments.

Where a trust is created on the death of an individual as a result of a will, it is the Department's position that the notion of dealing at arm's length is not applicable where that trust acquired shares by virtue of the death of the individual. Therefore, in the situations described above it is our opinion that paragraph 84.1(2)(a.1) of the Act would not apply to the disposition of the X Co. shares by the estate to Y Co.

We hope these comments are of assistance.