6 February 1997 External T.I. 9702155 - APPROPRIATION OF CORPORATE PROPERTY

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: appropriation of corporate property

Position:

Reasons:

		970215
XXXXXXXXXX	V. Plant
(613) 957-2120
Attention:  XXXXXXXXXX

February 6, 1997

Dear Sirs:

Re: Disposition of property by a corporation to its shareholders

This is in reply to your letter received by the Income Tax Rulings and Interpretations Directorate on January 24, 1997. You have described an actual scenario involving two spouses, one of whom owns 51% of the shares of a Canadian-controlled private corporation (PharmcoA), and the other of whom owns 49% of PharmcoA. PharmcoA purchased 100% of PharmcoB for consideration consisting of loans from the vendor and from another party. Each of PharmcoA and PharmcoB owns a pharmacy.

Subsequent to the above transaction, the Ontario College of Pharmacists informed the individuals that 51% of the shares of PharmcoB had to be owned personally by the pharmacist, one of the spouses. In order to meet this requirement, you are proposing that PharmcoA transfer all of its shares of PharmcoB to the two individuals. The loans incurred by PharmcoA to finance the purchase of PharmcoB will be assumed by PharmcoB. You have asked for our comments on any potential capital gains arising from such a transaction.

Our comments

The interpretation you seek relates to a proposed transaction to be undertaken by specific taxpayers and, therefore, we bring to your attention Information Circular 70-6R3 dated December 30, 1996 issued by Revenue Canada, Customs, Excise and Taxation. Confirmation with respect to proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. Where, however, the issue to be considered involves a question of fact, the Department will not rule unless all of the relevant facts are known. Nevertheless, we can offer the following general comments.

In general, transactions between related persons must take place at fair market value. In a situation such as the one you have described, where a transfer of property is made by a corporation to its shareholders for no consideration, then the value of such property would be included in the income of the shareholders pursuant to subsection 15(1) of the Income Tax Act (the "Act"). We have enclosed a copy of Interpretation Bulletin IT-432R2, Benefits Conferred on Shareholders.

In addition, where a corporation has disposed of anything to a person with whom the corporation was not dealing at arm's length (or to a shareholder of the corporation) for no proceeds or for proceeds less than the fair market value thereof, paragraph 69(1)(b) (or, in the case of a shareholder subsection 69(4)) of the Act deems the corporation to have received proceeds of disposition equal to that fair market value. To the extent that such deemed proceeds of disposition exceed the cost amount of the property to the corporation, an amount would be included in the corporation's income. We have enclosed Interpretation Bulletin IT-405, Inadequate Considerations- Acquisitions and Dispositions, for additional information on such transactions.

In order for interest on a loan to be deductible for tax purposes, it must have been incurred for the purposes of earning income from a business or property. Where no property has been acquired, for example where PharmcoB assumes the loans, any interest expense relating to the loans would not be deductible.

We trust you will find our comments helpful.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch