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
RE: Subparagraph 40(1)(a)(iii) and Subsection 55(2) of the Income Tax Act
We are writing in response to your letter of March 29, 1983 wherein you requested confirmation of your interpretation of the application of subparagraph 40(1)(a)(iii) when subsections 55(2) and 84(3) are applicable.
In your example, a Canadian corporation ("the corporate shareholder") disposes of its shares in another Canadian corporation by having those shares redeemed by the other corporation. The consideration received by the corporate shareholder consists entirely of a note payable on a specified date after the end of the shareholder's taxation year.
In your opinion, where no post-1971 earnings are present, the combined deeming effect of subsections 84(3) and 55(2) is to treat the corporate shareholder as having received the redemption amount as proceeds of disposition for its shares. These proceeds of disposition are however, in the form of a note, so in your view, the corporate shareholder should be in precisely the same position for tax purposes as if it had sold the shares to a third party for similar consideration, and therefore, when calculating any gain realized on the redemption, should be entitled to a reasonable reserve under subparagraph 40(1)(a)(iii) in respect of the amount of his proceeds of disposition which are not due until after the end of the year.
In our opinion, from a technical viewpoint, a reserve under subparagraph 40(1)(a)(iii) cannot be taken when subsections 84(3) and 55(2) are applicable since, in view of the fact that the shares are cancelled on the redemption, the note cannot be "conditional payment" as described in paragraph 3 of IT-436.
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© Her Majesty the Queen in Right of Canada, 1983
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© Sa Majesté la Reine du Chef du Canada, 1983
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