7 September 1990 Income Tax Severed Letter - Interpretation of the application of paragraph 111(4)(e) and subsection 69(11) to a hypothetical situation

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: Subsections 69(11) and 111(4) of the Income Tax Act (Canada) (the "Act")

This is in response to your letter of February 6, 1990 in which you requested our interpretation of the application of paragraph 111(4)(e) and subsection 69(11) to the hypothetical situation described below.

Assumptions

• 1. A corporation, X Co, which is a public corporation, within the meaning of paragraph 89(1)(g) of the Act, acquires property (the "property") from a person, in respect of whom X Co is a specified person within the meaning of subsection 69(12) of the Act in return for the issuance of its shares with a fair market value equal to that of the property. An election under subsection 85(1) of the Act is filed in respect of the acquisition so that the transferor's proceeds of disposition of the property and X Co's cost thereof are deemed to be an amount which is less then the fair market value of the property at the time of the acquisition.
• 2. Within three years from such acquisition, control of X Co would be acquired. X Co would file an election under paragraph 111(4)(e) so as to deem the property to have been disposed for proceeds equal to its fair market value at the time of the acquisition of control. The effect of this election would be that certain of X Co's net capital loss, within the meaning of paragraph 111(8)(a) of the Act, which would otherwise have expired on the acquisition of control would be utilized.

Opinions

Whether the provisions of subsection 69(11) would apply to the transfer of the property to X Co referred to in paragraph 1 above would be a question of fact which could only be determined by reference to all of the relevant circumstances. For example, it would be a question of fact whether the acquisition of the property by X Co was part of the same series of transactions as the acquisition of control of X Co. Thus we are unable to express any opinions as to the possible application of subsection 69(11) in this situation. However, we are able to provide some general comments as to the interpretation of subsection 69(11).

First, the reference in subsection 69(11) to a "disposition" includes a disposition which is deemed to occur by virtue of an election under paragraph 111(4)(e) of the Act. You are of the view that there is no actual disposition of assets, in respect of which an election under paragraph 111(4)(e) is made, by the corporation making the election. We agree that this is the case and note that this is precisely the reason that paragraph 111(4)(e) is required to deem there to be a disposition of such assets.

You also suggest that the case law establishes that a transaction which is deemed to be a particular thing is not the same as a transaction that actually is the particular thing. In our view, the cases you cite do not support the proposition that the reference in a provision of the Act to which is deemed, for purposes of the Act, to occur by virtue of another provision of the Act, e.g. paragraph 111(4)(e).

Secondly, you enquired as to whether the application of subsection 69(11) to the situation described herein is precluded because the fair market value of the shares of X Co issued as consideration for the property was equal to the fair market value of the property at the time of the transfer of the property to X Co. In our view, the application of subsection 69(11) to a transfer is not precluded because the transfer is for fair market value consideration. Subsection 69(11) may apply where the proceeds of disposition of, as opposed to the value of the consideration for, the transferred property is less than the fair market value of such property.

The comments contained herein are only expressions of opinions given in accordance with paragraph 24 of Information Circular 70- 6R.