14 February 1984 Income Tax Severed Letter

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.

REVENU CANADA TAXATION MEMORANDUM

DATE: February 14, 1984

TO- BELLEVILLE DISTRICT OFFICE

FROM- HEAD OFFICE
        Corporate Rulings Division 
        V.A. Sider
        995-1178

ATTENTION- M.F. Sisson
          Chief of Audit

RE: Subsection 85(1)

Your memo of January 10 outlines several questions concerning the application of subsection 85(1).

1. You have indicated that in circumstances where a taxpayer transfers property to a corporation pursuant to subsection 85(1) and the F.M.V. of the assets transferred is less than the F.M.V. of the non-share consideration received, there is, at that time, an appropriation by the taxpayer pursuant to subsection 15(1). Paragraph 9 of IT-291R

states, however, that subsection 15(1) will only be applied in circumstances where the total F.M.V. of the non-share consideration exceeds the F.M.V. of all properties transferred. Due to the mechanics of section 85, this excess that may occur on one property but not overall is lost in the calculation of deemed proceeds, agreed amounts and the calculation of the A.C.B. of the shares. You have asked how you should account for this excess occurring on one property but not overall.

The excess of the non-share consideration over the fair market value of a transferred property in such a situation should be considered to be non-share consideration of another property. If this is not accepted by the taxpayer, the application of subsection 15(1) should be considered.

2. There are circumstances where a taxpayer, on the transfer of property, to a corporation (of which he is not the sole shareholder), may be considered to have conferred a benefit on the other shareholder(s) with respect to a particular property transferred. However, if the consideration for all properties transferred is taken into account, no benefit may be considered to have been conferred. You have asked whether 85(1)(e.2) would be applied in such instances.

Generally, it is difficult to argue that it is reasonable to regard that a gift has been made to other shareholders in circumstances where the fair market value of the aggregate consideration received for all property transferred under 85(1) is not less than the aggregate fair market value of that property.

3. You have indicated that you are currently involved in a number of cases where the taxpayers have filed elections pursuant to subsection 85(1) and aggregate all consideration received. For example, a taxpayer transfers 10 pieces of equipment to a corporation with a F.M.V. of $50,000. The taxpayers wish to transfer the property at the U.C.C. of $25,000 and use this figure as the agreed amount. The consideration received is a note for $20,000 and shares. Section 85 envisages a property by property transfer. The taxpayer is required to provide the F.M.V., consideration received and agreed amount for each property as well as designate the order of disposition.

As indicated in paragraph 12 of IC 76-19R, where all the depreciable property of a prescribed class is transferred, it is not necessary that each property be listed on the T2057 or that the consideration for each be shown on the election form. If, for some reason, you want to know the details relating to each property, the taxpayer is required to provide them. If he fails or refuses to provide them within a reasonable time period, the election could be considered invalid. The taxpayer is not required, however, to make the designation referred to in paragraph 85(1)(e.1), but in the absence of such a designation the Minister may make appropriate designations.

4. You have also asked whether, in the valuation of shares for the purpose of paragraph 85(1)(e.2), account should be taken of the deferred tax liability of the transferee with respect to the property transferred.

It is our understanding that for the purpose of paragraph 85(1)(e.2) deferred tax liabilities relating to the transfer property are not considered in the valuation of share consideration received.

If you have further questions relating to the administration of subsection 85(1) we suggest that you contact the Audit Applications Section in the Audit Support Division of the Audit Directorate. S. Claude Lemelin is the section chief. We have discussed our answers with Bernie Wolters (996-9986) of that section.

Chief Corporate Reorganizations Section Corporate Rulings Division