23 September 1982 Income Tax Severed Letter RCT 5-4379 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 XXX:

We are writing in response to your letter of September 3, 1982 wherein you requested clarification of Revenue Canada's view on a situation in which non-depreciable capital property is transferred by an individual to a Canadian corporation in exchange solely for shares. Your specific concern is whether subsection 85(1) of the Income Tax Act can be used when some of the shares are received immediately but the remaining shares are to be issued in the future.

You have indicated that in your opinion the references in 85(1) to "a right to receive shares" and to "shares receivable" accommodate this type of transaction. Our concerns in this area lie with the valuation problems which might arise in connection with shares to be issued in the future. This right to receive shares or shares receivable must be valued for purposes of 85(1)(e.2) and also for purposes of 85(1)(g) and (h). 85(1)(h) for instance allocates the elected amount to the common shares receivable on the basis of the relative fair market values of each class of common shares. Each share of the same class of shares ends up with the same cost. It appears that the legislation assumes that each common share of a particular class has the same value. If some shares are received but some are only receivable and by agreement won't be issued until some specified date in the future, it is not likely that the latter shares have the same value as the issued shares. The right to receive shares is not likely entitled to any distribution of assets on the disolution of the corporation nor would it be entitled to dividends.

This is why the right to receive shares would not likely have the same value as the shares would if they were issued. Our concern is that since all shares of the same class get allocated the same cost base regardless of whether they are received or receivable the shares receivable will get allocated more cost base than their relative value would warrant. This assumes of course, that shares received are worth more than shares receivable of the same class.

Notwithstanding the above comments we are in agreement with you that the language of subsection 85(1) does not prevent the use of a right to receive shares as consideration. However, to fulfill the preamble of 85(1) it is our view that some shares must be received as consideration at the time of the disposition. In addition, due to the concerns raised above, it is our administrative position that where a right to receive shares is used as consideration in an 85(1) transfer the value of the right to receive a share of a particular class should not be significantly different from the value of an issued share of that particular class and therefore to that end the right must be exercisable within a reasonable period. The reasons for any undue delay will be carefully examined.

In the situation you presented where the shares which were not issued at the time of the transfer are to be issued in the following fiscal year and before the transferor is required to file a tax return covering the 85(1) election in our view provided the right to receive a share does not have a significantly different value than an issued share the 85(1) election would not be invalid on the basis that all the shares were not issued immediately.

We trust these comments will be of assistance to you.