7 May 1990 Income Tax Severed Letter RRRR377 - Whether subsection 191(4) applies in a particular section 85 rollover — May 1990 Vancouver District Office Round Table

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.

MAY 1990 VANCOUVER DISTRICT OFFICE ROUND TABLE 5. PART VI.1 TAX

Assume that an asset with a fair market value of $100 has been transferred on a rollover basis pursuant to section 85 of the Act to a corporation in exchange for a preferred share of that corporation. The preferred share is redeemable for $100 plus any accrued and unpaid dividends. At the time the share is redeemed, the amount of the accrued and unpaid dividends on the share is $10. Does subsection 191(4) of the Act apply? In particular, in these circumstances would the specified amount in respect of the preferred share exceed the fair market value of the consideration for which the share was issued?

Department's Position

Where no amount has been specified for the purposes of subsection 191(4), the specified amount will be the amount for which the share is to be redeemed, acquired or cancelled.

Thus, in the example described, the specified amount determined at the time of the issuance of the share would be $100 as this amount is the only amount that is specified at the particular time. This specified amount would not exceed the fair market value of the consideration for which the share was issued. Consequently, subsection 191(4) would apply in respect of the deemed dividend arising on the redemption of the share, except to the extent of the $10 referable to unpaid dividends, which subsection 191(5) would specifically exclude from the application of subsection 191(4).

Prepared by C. Robb

MAY 1990 VANCOUVER DISTRICT ROUND TABLE QUESTION 5

Notes

• 5. PART VI.1 TAX

Assume that an asset with a fair market value of $100 has been transferred on a rollover basis pursuant to section 85 of the Act to a corporation in exchange for a preferred share of the corporation. The preferred share is redeemable for $100 plus any accrued and unpaid dividends. At the time the share is redeemed, the amount of the accrued and unpaid dividends on the share is $10. Does subsection 191(4) of the Act apply? In particular, in these circumstances would the specified amount in respect of the preferred share exceed the fair market value of the consideration for which the share was issued?

The author of the question is asking for the Department's view of the specified amount where a share is issued under the above circumstances and the corporation has not expressly specified an amount for purposes of subsection 191(4). That is, will the Department accept the fair market value of the consideration as the specified amount by default? The answer to this question will be important in determining what portion, if any, of a deemed dividend will be an excluded dividend and an excepted dividend for the purposes of Part VI.1 and section 187.2 of the Act.

In the 1989 revenue Canada Round Table [Q20(b)] we confirmed our position that

• "Unless the terms and conditions of the share or an agreement in respect of the share specify a different amount for the purposes of subsection 191(4), the specified amount will be the amount for which the share is to be redeemed, acquired or cancelled."

The response to the May 1990 Vancouver District Office round table question follows from our quoted 1989 response. In the current example, the amount for which the share is to be redeemed, acquired or cancelled includes any accrued and unpaid dividends thereon. This aggregate amount would not be the specified amount since the specified amount is determined "at the particular time".

In the context of the current question this position would result in the following tax consequences, assuming no other amount is expressly specified by the taxpayer:

• 1. The specified amount is $100 determined at the time of issuance. The words "including an amount for which the share is to be redeemed, acquired or cancelled (together with, where so provided, any accrued and unpaid dividends thereon)" establish that at the particular time the only amount that has been specified is $100. This ensures that at least the listed amounts would qualify for relief from Part VI.1 tax where the taxpayer makes no special efforts to specify a different amount. That is, a default value of nil is avoided.
• 2. The specified amount does not exceed the fair market value of the consideration for which the share was issued.
• 3. Subsection 191(5) results in the accrued and unpaid dividend (i.e. $10) not being an excluded or excepted dividend as follows:

Amount paid on redemption, acquisition or
 cancellation of the share          $110
Paragraph 191(5)(b) amounts        Nil
Less: the specified amount determined
on issuance of the share            100
Subsection 191(4) does not apply to the extent of $10

• 4. JOINTLY-OWNED AL ESTATE

Has Revenue Canada changed its position on the tax consequences of partitioning jointly-owned real estate? The last stated position on this subject is set out in the 1981 Revenue Canada Round Table, question 54(3).

The Department's current position is still the one set out in question 54(3) of the 1981 Revenue Canada Round Table. However, that position is presently under review.