18 May 1995 Internal T.I. 9512137 - CAPITAL GAINS EXEMPTION

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.

Alberta CICA Roundtable
May 18, 1995

Question # 3, Small Business Capital Gains Exemption

We suggest the following as a response to Question # 3:

Subparagraph (a)(i) of the definition "disposition" in section 54 provides that a disposition includes a transaction by which a share is cancelled. Subsection 84(9) provides that where a shareholder has disposed of a share of a corporation as a result of the cancellation of the share by the corporation, the shareholder is deemed to have disposed of the share to the corporation. Accordingly, it could be argued that the taxpayer would have disposed of his shares in this situation.

However, depending on the circumstances, transactions like the ones described could, in accordance with the Federal Court of Appeal's decision in The Queen v. Kieboom 92 DTC 6382, alternatively be viewed as resulting in a disposition by the taxpayer of his economic interest in the corporation to his children. If so, the taxpayer would be deemed by paragraph 69(1)(b) to have received fair market value proceeds of disposition, the resulting capital gain would not be eligible for the deduction under subsection 110.6(2.1) (because, as the court held in Kieboom, the disposed property would be the taxpayer's economic interest in the corporation, not shares of a small business corporation) and section 74.1 could apply to attribute any income from the shares to the taxpayer.

Subsection 15(1) could also apply on the basis that the corporation confers a benefit on the children when it issues its shares to them for consideration less than their fair market value.

We are also providing our comments on the original response proposed for Q.# 3:

First sentence - The position described here (and which, as the you point out, was reflected in the Department's response to Q.20 at the 1991 Round Table) deals with a situation different from the one set out in the question, i.e. the 1991 question dealt with a situation where the "new" identical shares were issued to the same person who held the "old" shares, whereas here the situation is one where the "new" shares are issued to different persons. So it does not seem appropriate to argue that the taxpayer has not disposed of his shares on the basis suggested in the first sentence of the proposed response. Subparagraph (b)(i) of the definition "disposition" in section 54 expressly provides that there is a disposition when shares are cancelled, and subsection 84(9) provides that where a share of a corporation is cancelled, the shareholder is deemed to have disposed of the share to the corporation.

Second sentence - This sentence reflects the approach taken in Kieboom, but overlooks an important distinction drawn by the FCA in Kieboom. The court held that there had been a transfer of property (i.e. a portion of his economic interest in the company) by Mr. Kieboom to his wife and then to his children, but held that there had not been a transfer of shares of a small business corporation for purposes of subsection 73(5). For that reason, in our view, the second sentence of the proposed response should refer to a disposition of shares.

Although the question only asks whether there is a disposition, the answer should also cover eligibility for the enhanced capital gains deduction, 15(1) benefits and attribution of income.

A.M. Brake/M. Symes
7-951213.MB