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.
RE: Paragraph 85.1(1)(b), Bill C-64
I am replying to your letter of August 24, 1987 in which you enclosed a memo from Specialty Rulings concerning a ruling request involving section 85.1.
The ruling request involves vendors transferring their shares to the purchaser corporation in exchange for shares and warrants of the purchaser. Your administrative practice, as I understand it, has been to allow a purchaser to obtain a fair market value basis and a vendor to obtain a rollover, in respect of a fraction of a share acquired by the purchaser corporation, where a combination of shares and other consideration has been received from the purchaser corporation. This treatment is only available where the purchaser has allocated the share consideration to a specific fraction of each share acquired. As a result of the amendments to section 85.1, a purchaser may choose not to allocate the share consideration given by it to any fraction of the shares acquired from the vendor in order that section 85.1 will not apply to the acquisition. This will give the vendor the option of transferring the shares to the purchaser at their fair market or electing any amount between the cost of the shares and their fair market value under subsection 85(1). Presumably, vendors who are individuals who have not used all of their capital gains exemption will transfer the shares at their fair market value.
We do not consider this arrangement offensive since there is symmetric treatment of the vendor and the purchaser. The amount elected by the vendor will determine the vendor's proceeds of disposition and the cost of the vendor's shares to the purchaser. In addition, it should be noted that the same result could be achieved by simply having the vendor and purchaser elect under subsection 85(1), since paragraph 85.1(2)(a) provides that subsection 85.1(1) will not apply when such an election has been filed.
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