17 April 1989 Income Tax Severed Letter 5-7205 - Transfer of property to a corporation

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.

Dear Sirs:

This is in reply to your letter of December 6, 1969 in which you requested our comments with respect to the following situation:

• 1. A taxable Canadian corporation ("Opco") is a wholly-owned subsidiary of another taxable Canadian corporation ("Holdco").
• 2. Mr. X, an individual resident in Canada, owns all of the issued shares of a class of preferred, voting shares of Holdco. These shares constitute capital property to Mr. X.
• 3. The common shares of Holdco arc held by a group of more than five individuals, each of whom is resident in Canada and deals at arm's length with Mr. X , within the meaning of subsection 251(1) of the Act.
• 4. A new taxable Canadian corporation ("Newco") would be created. Each of the common shareholders of Holdco would transfer all of his shares of Holdco to Newco, using the rollover provisions of subsection 85(1) of the Act, and would receive as consideration one common share of Newco for each common share of Holdco.
• 5. Immediately thereafter, Newco would purchase Mr. X's shares of Holdco, issuing a promissory note to him as consideration. Mr. X would claim a capital gains exemption with respect to this transaction pursuant to subsection 110.6(2.1) of the Act.
• 6. Shortly after the sale described in paragraph 5 above, Opco would declare and pay a dividend of a certain amount to Holdco, and Holdco would in turn declare and pay a dividend of the same amount to Newco. Newco would use the proceeds of the dividend to repay its promissory note to Mr. X
• 7. Shortly thereafter, Holdco would amalgamate with Newco to form Amalco.

It is apparent that the situation you described relates to specific taxpayers. Confirmation of the tax consequences of proposed transactions is only provided in response to a request for an advance income tax ruling. if the transactions have not been entered into, it would be appropriate to request an advance income tax ruling in accordance with our Information Circular 70-6R dated December 18, 1978. Although we are unable to provide arty binding confirmation in response to your request, we have stated below some general comments regarding the possible application of subsection 245(2) of the Act.

Our Comments

Section 84.1 of the Act indicates circumstances in which amounts received by a shareholder (Mr. X) of a corporation (Holdco) from another corporation (Newco) on a disposition of shares of the first-mentioned corporation (Holdco) are deemed to be a dividend. In the hypothetical situation described above, you stated that Mr. X would be dealing at arm's length with Newco. The assumed facts in your example are apparently not subject to the application of paragraphs 84.1(2)(b) and (c) of the Act which would otherwise deem Mr. X not to deal at arm's length with Newco. As stated in paragraph 251(1)(b) of the Act, it is a question of fact whether at a particular time in a certain situation Mr. X would deal at arm's length with Newco. Provided that Mr. X is dealing at arm's length with Newco, subsection 84.1(1) of the Act would not apply to deem Mr. X to have received a dividend upon the transfer of his Holdco shares to Newco. It is, of course, not possible to state categorically whether subsection 245(2) of the Act would be applied to redetermine the tax consequences that would otherwise arise in a specific case. As noted in paragraph 25 of Information Circular 88-2, if certain transactions are designed to circumvent the application of subsection 84.1(1), for example, subsection 245(2) would apply.

In addressing the situation described above, no consideration has been given to the income tax implications, if any, with respect to the issuance of the preferred shares or with respect to any other previous transaction that may be a part of a series of transactions that includes the transactions described above. Also, no consideration has been given to other provisions, such as subsections 55(2), 110.6(7), 110.6(8) or 112(3), of the Act, which may apply in a specific situation where dividends are paid or shares are sold.

As stated in paragraph 24 of our Information Circular 70-6R, the comments stated herein are opinions only and are not rulings.