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:
Re: Subsection 7(1.5) of the Income Tax Act
This is further to our letter to you of May 28, 1990 concerning the interpretation of subsection 7(1.5) of the Act in the following situation.
X, a Canadian resident individual, is employed by a Canadian-controlled private corporation (CCPC). X acquires shares of another CCPC, A Co., that does not deal at arm's-length with his employer in circumstances such that subsection 7(1.1) of the Act applies.
In the course of a reorganization, X exchanges the shares of A. Co. for shares in B Co. to which subsection 85.1(1) of the Act applies to the exchange.
B Co. and another corporation subsequently amalgamate to form Amalco in an amalgamation to which section 87 of the Act applies. X disposes of his shares of B Co. and acquires shares in Amalco. Subsection 87(4) of the Act applies to the disposition.
You asked whether subsection 7(1.5) of the Act would apply to the exchange by X of the shares of B Co. for shares of Amalco on the amalgamation. It was your concern that although subsection 7(1.5) of the Act applies on the exchange of the shares of A Co. for the shares of B. Co., the rules in paragraphs (a) to (d) thereof are only applicable for the purposes of subsection 7(1.1) and paragraph 110(1)(d.1) of the Act and not for the purposes of subsection 7(1.5) of the Act.
It was your view that, from a policy perspective, subsection 7(1.5) of the Act should apply to a series of exchanges within subsections 85.1(1) or 87(4) of the Act since that is no possibility of "cashing- out" by the employee.
In our previous letter, we advised you that, in the above situation, subsection 7(1.5) of the Act would not apply to the exchange by X of the shares of B Co. for the shares of Amalco as a result of the amalgamation.
We have now had an opportunity to discuss this matter further and would ask that you disregard the opinion expressed in our letter of May 28, 1990. In our view, the rules in paragraphs 7(1.5)(a) to (d) would apply for the first reorganization as well as for any future ones, with the result that, on the exchange by X of the shares of B Co. for the shares of Amalco in the above situation, subsection 7(1.5) would be applicable.
We regret any inconvenience caused to you by our previous letter.
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© His Majesty the King in Right of Canada, 1990
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté le Roi du Chef du Canada, 1990
Email this Content