28 February 1983 Income Tax Severed Letter RCT 5-6124

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:

This is in reply to your letter of March 7, 1984 in which you requested an interpretation of the application of paragraphs 88(1)(d) and (d.2) of the Act.

You outlined a situation involving the death of a taxpayer who owns all the shares of a holding company ("Holdco") which in turn owns all the shares of an operating company ("Opco"). You described the following tax consequences and events following the taxpayer's death:

• 1. 0n the taxpayer's death a capital gain will arise due to the deemed disposition at fair market value under paragraph 70(5)(c) of the shares of Holdco.
• 2. The estate of the deceased taxpayer will be deemed by paragraph 70(5)(c) to acquire the shares of Holdco at their fair market value at the time of the taxpayer's death.
• 3. The estate will incorporate Holdco II, a new corporation.
4. The estate will transfer its shares of Holdco to Holdco II at fair market value, taking back fair market value consideration in either or a combination of:
• (a) shares of Holdco II with a paid-up capital and cost bee equal to the fair market value of the Holdco shares transferred; or
• (b) cash or notes.

You enquired whether, in our opinion, paragraph 88(1)(d.2) would operate to prevent an increased allocation, pursuant to paragraphs 88(1)(c) and (d), to the adjusted cost base of the Opco shares acquired by Holdco II On the winding up of Holdco.

The provisions of paragraph 88(1)(d.2) of the Act will deem two dates of acquisition:

• (a) The date the estate is deemed to have acquired control of Holdco; and
• (b) The date Holdco II is deemed to have acquired control of Holdco.

It is necessary to determine the first date in order to determine the second date. The date the estate last acquired control of Holdco is deemed by paragraph 88(1)(d.2) to be the time the deceased (the vendor) last acquired control of Holdco. The date Holdco II acquired control of Holdco is deemed to be the earlier of the actual date on which the estate (the vendor) last acquired control of Holdco, which is the date of death, and the date the estate is deemed to have last acquired control of Holdco, which is the date of acquisition by the deceased. Therefore, Holdco II is deemed by paragraph 88(1)(d.2) of the Act to have acquired control of Holdco at the earlier date, which is the date of acquisition by the deceased.

You also asked whether in our opinion an increased cost base allocation pursuant to paragraph 88(1)(d) would be available where the deceased taxpayer provides in his will that the shares of Holdco are to be transferred to a new company, such as Holdco II, in return for shares of Holdco II, or for notes or cash or any combination of the foregoing equal in value to the fair market value of Holdco at the taxpayer's death. You suggested that paragraph 88(1)(d.2) might not be applicable in this case if the will provisions described were considered to come within the exception in that paragraph. It is our opinion that the wll provisions described would not result in an acquisition by Holdco II of the shares of Holdco by way of bequest or inheritance.

The opinions expressed in the previous paragraphs are not advance incone tax rulings and are herefore, not binding upon Revenue Canada, Taxation, as explained in paragraph 24 of Information Circular 70-6R, published by this Department on December 18, 1978.