11 February 1986 Income Tax Severed Letter RCT 55-262

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:

Our letter of February 11, 1986 outlined our understanding of the facts in the series of transactions which resulted in the sale of certain shares to XXX

Your submission addressed the following four issues:

A Purpose of the legislation B Construction of subsection 55(2) C Administrative practices of Revenue Canada D Principles of administrative law

Our comments may be summarized as follows:

A Purpose of the legislation

We cannot agree that the purpose of the legislation is to measure gains on property disposed of by a corporation with reference to the appreciation in value of the property during the period in which the persons who were shareholders of the corporation at the time of the disposition of the property owned their shares of the company. The assets of the corporation are not those of the shareholders. The "inherent cost" of the property of the corporation which is reflected in the shares of the corporation is not taken into account in computing the gain to the corporation on a disposition of the corporation's property. The legislation provides a specific mechanism for allocating this "inherent cost" to property of the corporation only on a wind-up which is subject to subsection 88(1) in which the property becomes property of the shareholder. To attribute the cost of shares to the cost of property of a corporation is in our opinion contrary to the purpose of the legislation which provides for two levels of taxation, one at the corporate level and another at the shareholder level.

B Construction of Subsection 55(2)

You state that subsection 55(2) does not apply unless the shares that would be the subject of the hypothetical disposition are owned at the outset of the series of transactions. Subsection 55(2), as we read it, does not require the shares in respect of which the dividend is received to be outstanding at the outset of the series of transactions. We would not view it as "a logical absurdity" that subsection 55(2) should apply to a series of transactions in which a non-share property of a corporation is transferred to another corporation for share consideration which is then converted into inter-corporate dividends. In our opinion the shares acquired by the transferee during such a series are precisely the shares referred to in subsection 55(2). We feel that subsection 55(2) applies to the shares of 286534 and 286537 on which the dividends in item 8 were paid.

C Administrative practices of Revenue Canada

D Principles of administrative law

To the best of our knowledge we have not provided favourable rulings on the application of subsection 55(2) where dividends were paid which represented the value of what was being sold to an arm's length party. The series of transactions in respect of which we propose to assess is not analogous to transactions on which we may have ruled favourably.

We would be pleased to meet with you should you wish to discuss the proposed assessment.