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 your letter of September 27, 1983 in which you requested our views concerning the interaction of subparagraph 95(2)(f)(ii) and subsection 85.1(3) of the Income Tax Act (the Act) in the following circumstances:
- (1) A Canadian corporation (“C”) acquired 100% of the shares of a U.K. operating company (“UKO”) at the end of XXX when one pound was equivalent to XXX Canadian. The acquisition cost was XXX pounds of XXX.
- (2) During XXX the shares of UKO were sold to a new U.K. holding company (“UKH“) on a share-for-share exchange covered by subsection 85.1(3) of the Act. There was no non-share consideration issued by UKH and the fair market value of UKO at the time of transfer was in excess of $ XXX pounds. The exchange rate at the time of the transfer was one pound equals XXX Canadian.
- (3) During XXX the shares of UKO were sold by UKH to an unrelated purchaser for cash in the amount of XXX pounds. The exchange rate at the time was one pound equals to XXX Canadian resulting in Canadian dollar equivalent sale proceeds to UKH of XXX.
- (4) At all times between acquisition in XXX and sale in XXX C owned directly (or indirectly through UKH) 100% of all the outstanding shares of UKO.
- (5) At the time of sale in XXX the “exempt surplus” of UKO was XXX pounds. There was no taxable surplus then on hand.
- (6) At the time of sale, the shares of UKO qualified as “excluded property” as defined in paragraph 95(1)(a.1) of the Act as all or substantially all of UKO's property was used or held principally for the purpose of gaining or producing income from an active business.
Your concern was with respect to the computation of the capital gain to UKH on the disposition of the UKO shares in XXX and in particular the appropriate rate of exchange to convert the Canadian dollar adjusted cost base of shares of UKO to U.K. currency to compare against the U.K. currency proceeds of disposition XXX pounds).
You presented three alternatives as follows:
- (i) the rate of exchange prevailing on the date XXX when C originally acquired UKO;
- (ii) the rate of exchange prevailing on the date XXX the shares of UKO were acquired by UKH in a share-for-share exchange pursuant to the provisions of subsection 85.1(3) of the Act; or
- (iii) the rate of exchange on the date XXX of the ultimate sale of shares of UKO by UKH.
It is our opinion that subsection 85.1(3) of the Act provides for a flow-through of historical cost and that this interpretation is consistent with the purpose of subsection 85.1(3) of the Act. Therefore it is our view that alternative (i), not alternative (ii) as you suggested, provides the appropriate rate of exchange at which to convert the Canadian dollar adjusted cost base to U.K. currency.
We trust that this information will be of assistance to you.
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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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