25 November 1992 Income Tax Severed Letter 9224085 - 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.

922408
S. Leung
19(1) (613)957-2115

November 25, 1992

Dear Sir:

Re: Transfer of Property to A Corporation

We are writing in response to your letter of July 31, 1992 wherein you requested our view on the tax consequences of the transactions described in your letter. You have also provided us with additional information regarding the transactions described in your letter during our telephone conversation of September 18, 1992 (19(1)/Leung). The situation described in your letter involves two related individuals who, together, own 100% of a Canadian-controlled private corporation ("Opco"), as defined under paragraph 125(7)(b) of the Income Tax Act (the "Act"), the property of which they wish to transfer, for legal reasons, to another corporation ("Canco") which will be owned by them in the same proportions as they own the shares of Opco. Opco may or may not cease to exist after the transfer.

The situation described in your letter appears to involve seriously contemplated transactions and identifiable taxpayers. Consequently, we would like to bring your attention to paragraph 21 of Information Circular 70-6R2, dated September 28, 1990, issued by Revenue Canada,

Document Disclosed Pursuant to The Access To Information Act Document Divulgué en vertu de la loi sur l'accès à l'information

Taxation (a copy of which is herewith enclosed) wherein it is stated that when a requested interpretation relates to a contemplated transaction, a taxpayer should request an advance income tax ruling rather than an opinion. The procedures for requesting an advance income tax ruling are set out in paragraph 15 of the said circular. We are, however, able to provide you with the following general comments.

In a situation where an individual, who is a Canadian resident for the purposes of the Act, transfers his or her shares of a corporation ("subject corporation") resident in Canada to another corporation ("purchaser corporation") with which he or she does not deal at arm's length, and immediately after the transfer the subject corporation is connected with the purchaser corporation within the meaning of paragraph 186(4) of the Act, the provisions of subsection 84.1(1) of the Act may have application. However, no tax consequences will arise under subsection 84.1(1) if the maximum amount that will be received by the transferor from the transferee corporation as proceeds in the form of any non-share consideration and the paid-up capital of any share consideration does not exceed the greater of the paid-up capital of the transferred shares and what might be referred to as the transferor's arm's length actual adjusted cost base of the shares, as determined by taking into account the provisions of paragraphs 84.1(2)(a), (a.1) and (a.2) of the Act. The terms "paid-up capital" and "adjusted cost base" have the meanings assigned by paragraphs 89(1)(c) and 54(a) of the Act, respectively. Section 84.1 is primarily dealt with in Interpretation Bulletin IT-489 and the Special Release thereto. However, the said bulletin was published in 1982 and does not reflect the amendments to the provisions of section 84.1 which became effective after May 22, 1985. A new bulletin is in the process of being prepared.

Where a taxpayer disposes of property that is an eligible property, within the meaning assigned by subsection 85(1.1) of the Act, to a taxable Canadian corporation, as defined under paragraph 89(1)(i) of the Act, for consideration including shares of the capital stock of the corporation, the taxpayer and the corporation may file a joint election pursuant to subsection 85(1) of the Act. Whether any tax consequences will arise on the transfer will depend on the agreed amount in respect of the subsection 85(1) election, the cost amount and the fair market value of the transferred property, and the fair market value of any non-share consideration and any share consideration received. You may want to consult Interpretation Bulletin IT-291R, dated June 6, 1980, and Information Circular 76-19R2, dated June 15, 1990, for more information regarding the application of subsection 85(1) of the Act.

Where shares of a corporation are redeemed or purchased for cancellation, provisions of the Act, such as subsections 55(2), 84(3) and 186(1), and sections 187.2, 187.3, and 191.1, may have application.

Document Disclosed Pursuant to The Access To Information Act Document Divulgué en vertu de la loi sur l'accès à l'information

On the winding-up of a corporation, attention should be drawn to the application of, among other things, subsections 69(5), 84(2), 88(1) and 88(2) of the Act. For more information regarding these provisions, you may wish to refer to Interpretation Bulletins IT-126R, IT-488R and IT-149R4.

We regret that without a detailed description of the steps to be undertaken to implement the transactions, we are not able to provide any other comments which may be of assistance.

Yours truly,

for Director
Reorganizations and Foreign Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch

Document Disclosed Pursuant to The Access To Information Act Document Divulgué en vertu de la loi sur l'accès à l'information