20 March 1990 Ministerial Letter 59228 F - 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.

March 20, 1990

Dear Sirs:

Re:  Subsection 110.6(8) of the  Income Tax Act (the "Act")

This is in reply to your letter dated December 7, 1989, whereby you requested our opinion regarding the applicability of subsection 110.6(8) of the Act in a hypothetical situation that can be summarized as follows:

     An individual, Mr. A, is the sole shareholder of Opco.  The adjusted cost base to Mr. A of his Opco shares is nil. The fair market value of the Opco shares is $1 million.  Of the $1 million value of Opco shares, approximately $200,000 is attributable to the fact that dividends were not paid on preference shares of Opco which have since been redeemed.  Mr. A transfers all of his shares of Opco to Holdco for shares of Holdco.  An election is filed pursuant to subsection 85(1) of the Act, whereby the agreed amount of $500,000 gives rise to a capital gain of $500,000 for Mr. A.

You are of the opinion that, for purposes of subsection 110.6(8) of the Act, in these circumstances it may reasonably be concluded that no part of the capital gain of $500,000 is attributable to the fact that dividends were not paid on the preference shares. You base your opinion on the fact that, even had the dividends been paid, the fair market value of the common shares of Holdco would have exceeded $500,000 and the elected amount and capital gain would still have been $500,000.

We agree with your opinion.  We are of the opinion that, in the circumstances described above, subsection 110.6(8) of the Act would not apply since no significant part of the capital gain would be attributable to the fact that dividends were not paid on a share of a corporation.

The above comments are based on the provisions of the Act referred to above and should not be interpreted as implying that any other provision of the Act would or would not apply to any actual transactions similar to those described above.

Our opinion as stated herein does not constitute a ruling and, as stated in paragraph 24 of Information Circular 70-6R, is not binding on Revenue Canada, Taxation.

Yours truly,

for DirectorReorganizations and Non-Resident DivisionSpecialty Rulings Directorate Legislative and Intergovernmental Affairs Branch