27 May 1992 Administrative Letter 9124166 F - Disposition of an Economic Interest

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.

May 27, 1992

Attention:  Sharon Gulliver

Paragraph 69(1)(b)

Disposition of an Economic Interest

Your inquiry to the Audit Application Division dated August 12, 1991, concerning the assessing position to be taken subsequent to the repeal of paragraph 245(2)(c) of the Income Tax Act ("the Act") in cases which are factually similar to Kieboom v. M.N.R. 90 DTC 1612 (T.C.C.) and Brooks v. M.N.R. 91 DTC 639 (T.C.C.), has been referred to our Directorate for reply.

Attached is a copy of a response, dated January 28,1992, which was prepared for Question 21 of the Winnipeg District Taxation Office Round Table held on February 20, 1992, dealing with Revenue Canada's assessing policy in situations where a spouse, child, or trust for the benefit of a spouse or child, acquires shares for a nominal amount, when the shares acquired have a significant fair market value, and the related spouse or parent otherwise owns all of the shares of the issuing corporation.

The Department's position is that, in such cases, there is a taxable disposition of an economic interest by the related spouse or parent, within the meaning of paragraph 69(1)(b) of the Act.

While the Kieboom and Brooks cases cited above depended, in part, upon the application of former paragraph 245(2)(c) of the Act (see Decision #91-25 of the Appeals and Referrals Division dated August 9, 1991, at p. 2), the repeal of paragraph 245(2)(c) does not detract from the Winnipeg Round Table position.

This is because paragraph 69(1)(b) of the Act provides that a taxpayer is deemed to have received proceeds of disposition equal to the fair market value of anything disposed of at non-arm's length for proceeds less than the fair market value thereof, and the words "disposed of" have consistently been interpreted by the Courts to be words of very wide meaning. In Henty House Property Limited v. Federal Commissioner of Taxation (1953) 88 C.L.R. 141, with reference to s. 59 of the Income Tax Assessment Act of Australia, it was held that:

The words "is disposed of" are wide enough to cover all forms of alienation ... and they should be understood as meaning  "become alienated from the taxpayer", whether it is by him or by another that the act of alienation is done.

Similarly, in Carter v. Carter (1896) 1 Ch. 62, at p. 67, Mr. Justice Sterling wrote that:

The words "disposed" and "disposition" in the Fines and Recoveries Act are not technical words, but ordinary English words of wide meaning; and where not limited by the context those words are sufficient to extend to all acts by which a new interest (legal or equitable) in the property is effectually created.

In Canada, the Exchequer Court came to the same conclusion in Victory Hotels Limited v. M.N.R. 62 DTC 1378, at p. 1385:

The words "disposed of" in s. 20 of the Income Tax Act are of the widest meaning and should, in my opinion, be given their widest ordinary or popular meaning bearing in mind, however, that they are being used in a taxation statute, in a matter where the properties which are to be "disposed of" are the assets used to earn the very income from which, according to certain specified rates, depreciation can be charged off.

Indeed, in the context of s. 20 of the Income Tax Act it is not unreasonable to give the words "disposed of" their widest meaning which would be "to part with", "to pass over the control of the thing to someone else" so that the person disposing no longer has the use of the property. Indeed, Bell in the South African Legal Dictionary, at p. 182, defined "disposed of" as follows: "to part with; to pass over the control of a thing to someone else."

For these reasons, we agree with your first suggested alternative, i.e. paragraph 69(1)(b) of the Act should be applied to dispositions of economic interests, in cases similar to Kieboom. Please note that the Federal Court Trial Division has agreed with the Tax Court's conclusion that Mr. Kieboom divested himself of an economic interest by diluting his own shareholdings.1 The Trial Division decision is under appeal to the Federal Court of Appeal, and we are informed by the Tax Litigation Section of the Department of Justice that the appeal will not be heard until sometime later this year.

The Department's Winnipeg Round Table Position includes a statement that subsection 15(1) of the Act may apply to the benefit conferred when shareholders subscribe for shares for nominal amounts. This position has recently found support, as evidenced by the Kieboom casecommentary found on page 13 of the CCH Tax Topics, Report # 1025; however, a caveat on its application is that the benefit must be received by the shareholder qua shareholder, as opposed to in some other capacity - see Winter et al v. The Queen 90 DTC 6681 (F.C.A.), at p. 6684.

Finally, circumstances may arise, as in Winter, supra, where it is also appropriate to assess under subsection 56(2) of the Act, on the basis that there has been a transfer of property, made pursuant to the direction of a controlling shareholder, as a benefit that the controlling shareholder desired to have conferred on new shareholder(s), which must be included in computing the controlling shareholder's income to the extent that it would be if the transfer of property had been made to the controlling shareholder. Note, however, the Federal Court of Appeal's holding in Winter, at p. 6684, that the validity of such an assessment depends upon a finding that the payee or transferee not be subject to tax on the benefit received.

for DirectorReorganizations and Foreign DivisionRulings DirectorateLegislative and IntergovernmentalAffairs Branch

1 The Queen v. Kieboom 91 DTC 5478, at p. 5485.