12 March 1999 External T.I. 9905825 - TRANSFER OF SHARES TO SPOUSE

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: general comments re transfer of shares of Canadian company to spouse

Position: N/A

Reasons: n/a

XXXXXXXXXX 		990582
T. Harris
Attention: XXXXXXXXXX  

March 12, 1999

Dear Sirs:

Re: Transfer of Shares to Spouse

Your letter of February 5, 1998, which was addressed to the Ottawa Tax Services Office, was recently forwarded to this directorate for reply. In your letter you requested our interpretation of the tax consequences applicable to the situation described below.

Ms. C, a Canadian citizen, is married to Mr. H, a citizen of Hong Kong. In 1993, Ms. C purchased shares of a private corporation (“Canco”), which went public in 1997. Ms. C and Mr. H were transferred to Hong Kong indefinitely on business. Ms. C wishes to transfer the shares which she owns in Canco to Mr. H. The value of the Canco shares has increased since Ms. C acquired them in 1993.

Our Comments

The situation described in your letter appears to involve actual proposed transactions relating to specific taxpayers. Assurance as to the tax consequences of actual proposed transactions will only be given in the context of an advance income tax ruling. The procedures for requesting an advance income tax ruling are outlined in Information Circular 70-6R3 issued by Revenue Canada on December 30, 1996. However, we can offer the following general comments which we hope will be of assistance to you. For the purpose of our response we have assumed that the shares in question represent capital property to the transferor.

Where property is transferred to a person with whom the transferor does not deal at arm's length, the transferor is generally deemed to have disposed of the property at fair market value, pursuant to paragraph 69(1)(b) of the Income Tax Act (the "Act"). However, subsection 73(1) of the Act provides, inter alia, that when a taxpayer transfers non-depreciable capital property to a spouse and both the taxpayer and the spouse are residents of Canada at the time, the property is deemed to have been disposed of by the taxpayer for proceeds equal to the adjusted cost base of the property. The spouse is also deemed to have acquired the capital property for an amount equal to those proceeds. The provisions of subsections 74.1(1) and 74.2(1) of the Act will apply to attribute to the transferor any income or loss from the property or any taxable capital gain or allowable capital loss from the subsequent disposition of the property by the spouse. The taxpayer may, however, elect in his or her tax return for the year of the transfer not to have the provisions of subsection 73(1) apply.

In the event that either the transferor or the spouse is not a resident of Canada at the time of the transfer, the provisions of subsection 73(1) will not apply and the provisions of paragraph 69(1)(b) of the Act will apply to deem the property to have been disposed of by the transferor for proceeds equal to the fair market value of the property. Where the transferor is a resident of Canada, the provisions of subsections 74.1(1) and 74.2(1) of the Act may, subject to subsection 74.5(1), still apply to attribute to the transferor any income or loss from the property or any taxable capital gain or allowable capital loss from the subsequent disposition of the property by the spouse. In the event that the transferor is not resident in Canada at the time of the transfer, the disposition will only have Canadian tax consequences if the capital property represents taxable Canadian property, within the meaning of paragraph 115(1)(b) of the Act, to the transferor. Taxable Canadian property includes, inter alia,

(a) shares of a corporation resident in Canada (other than a mutual fund corporation) that are not listed on a prescribed stock exchange; and

(b) shares of a corporation resident in Canada which are listed on a prescribed stock exchange or shares of a mutual fund corporation, if, at any time during the 5 year period that ends at that time, the taxpayer and any non-arm’s length persons owned 25% or more of the issued shares of any class of the capital stock of the corporation.

Also, where the transferor is not resident in Canada at the time of the transfer and the property represents taxable Canadian property to the transferor, the provisions of section 116 will apply to the disposition unless the shares are of a class of the capital stock of a corporation that is listed on a prescribed stock exchange (see paragraph 116(6)(b)).

In the situation described in your letter, if Ms. C ceased to be resident in Canada at the time she indefinitely moved to Hong Kong, the provisions of paragraph 128.1(4)(b) will need to be considered. In the circumstances where a taxpayer ceased to be resident in Canada prior to October 2, 1996, paragraph 128.1(4)(b) will only apply to deem a disposition of shares of a Canadian resident corporation at fair market value if such shares were not taxable Canadian property at that time. Where a taxpayer ceased to be resident in Canada after October 1, 1996, the legislative proposals on taxpayer migration which were released by the Minister of Finance for public consultation on December 23, 1998 propose that paragraph 128.1(4)(b) be amended effective October 2, 1996 to deem a disposition of shares of any Canadian resident corporation at fair market value immediately before the time that the taxpayer ceases to be resident in Canada. Whether a person ceases to be resident in Canada at a particular time is a question of fact which can only be determined following consideration of all of the relevant facts. The Department’s general views on the factors to be considered in determining whether a person is resident in Canada are set out in Interpretation Bulletin 221R2 Determination of an Individual’s Residence Status.

These comments are provided in accordance with the practice outlined in paragraph 22 of Information Circular 70-6R3.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
- 4 -

.../cont'd

- 1 -