9 August 1985 Income Tax Severed Letter RCT 5-7800 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 Sirs:

RE:     Transfer of property to a sister corporation

This is in response to your letter of June 18, 1985 wherein you requested clarification of our position with respect to transfers of assets between corporations which are owned by the same shareholder ("sister corporations").

It is your understanding that the Department will not provide favourable advance income tax rulings in respect of such transfers unless:

i) the total consideration received by the Vendor Corporation equals the adjusted cost base ("acb") of the property transferred;

ii) the shareholder's investment in the Purchasing Corporation equals this acb; and

iii) the paid-up capital of the shares of the Vendor Corporation is reduced by the acb.

The Department does not require that the consideration received on such transfers be less than the fair market value of the property transferred nor do we require a reduction of the paid-up capital of any shares.

Where the consideration includes shares of the Purchaser, we are often unable to rule that the provisions of subsection 55(2) of the Income Tax Act will not apply on the redemption of those shares. If the proposed transactions described in the ruling request include a sale of the Purchaser to an arm's length person, the redemption of the shares would clearly be subject to subsection 55(2). If it is proposed to sell the Vendor, the amount received by the Vendor on the redemption of the Purchaser shares is usually paid to the shareholder of the Vendor as a dividend prior to the arm's length sale. Again subsection 55(2) would clearly apply. If the proposed transactions described in the ruling request do not include an arm's length sale of the Vendor or Purchaser or some other increase in interest in any corporation of any person with whom the corporation that received the dividend deals at arm's length, we would rule that the provisions of subsection 55(2) would not apply in respect of the transactions as described in and of themselves. Such a ruling would not preclude the application of 55(2) if subsequently an arm's length person increased its interest in the Vendor or the Purchaser if such an increase was viewed as part of a series of transactions which included a dividend.

There may also be situations in which we are unable to give a favourable ruling with respect to the application of subsection 181(5) where fair market value consideration is received on a transfer.

To enable favourable rulings to be given with respect to subsections 55(2) and 181(5), we will permit transfers between sister corporations for less than fair market value consideration where the results, in our view, are appropriate.

We hope this will be of assistance.