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.
923260 XXXXXXXXXX
Attention: XXXXXXXXXX
Dear Sirs:
RE: Substituted Shares
This is in reply to your letter of October 20, 1992 in which you requested our opinion on the meaning of "substituted shares" as it relates to paragraph (e) of the definition of qualified small business corporation share in subsection 110.6(1) of the Income Tax Act. You presented the following hypothetical situation:
An individual own shares in Holdco, and Holdco owns shares in Opco. Holdco sells its shares of Opco to Newco, a newly created corporation owned by the individual. Subsequently the individual sells his shares of Holdco.
You queried whether the shares of Newco owned by the individual could be considered to be shares substituted for the shares of Holdco.
Our Comments:
The fact situation which you set out is quite specific and it appears that it may relate to definite contemplated transactions. Assurance as to the tax consequences of contemplated transactions can only be given in response to a request for an advance income tax ruling. If you wish to obtain any binding commitment with respect to an actual case with facts similar to your example, an advance income tax ruling application should be submitted. We do, however, provide the following comments for your information.
Generally, in order for one property to be considered to be a property substituted for another property, there would have to be a disposition of the former property and an acquisition of the new property in exchange for the former property. For instance, if the individual in the hypothetical situation were to transfer his shares of Holdco to Newco, receiving from Newco newly issued shares as consideration for the shares of Holdco, the shares of Newco would be viewed as being shares substituted for the individual's shares of Holdco.
Subsection 248(5) of the Income Tax Act expands the general concept of substituted property to specifically include two other groups of shares. Pursuant to paragraph 248(5)(a), where a person substitutes property B for property A and then substitutes property C for property B, each of property B and property C is deemed to have been substituted for property A. Paragraph 248(5)(b) deems stock dividends to be property substituted for the shares on which the dividends were paid.
In the hypothetical situation described above, it is our view that the shares of Newco would not be considered to be shares substituted for the shares of Holdco.
We trust that these comments will be of assistance.
Yours truly,
E. Wheeler for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch
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