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.
DECISION SUMMARY 5052-1
BILINGUAL SERVICES SECTION
J. P. Simard May 15, 1985
Reference: Sections 84.1, 85 and 86, ITAR 26(27).
Subject: Section 86 exchange of shares prior to a section 85 rollover in order to differ application of section 84.1.
Problem: 1) A taxpayer holds pre-1972 shares of Opco having a PUC of $14,400, an ACB (V. Day value) of $1.5 M and a FMV of $5 M.
2) The capital of the corporation is reorganized and the shares are exchanged for preferred shares with a PUC of $14,400, same ACB of $1.5 M and redemption value of $1.5 M. No benefit under 86(2).
3) New common shares are issued for $500 cash. The excess of value of old shares over new preferred shares ($3.5 M) is transferred on new common shares.
4) New common shares of Opco are rolled to Newco under 85(1). Consideration received includes preferred shares of Newco with a PUC of $3.5 M, redeemable at $3,500,500, ACB $500.
See Appendix.
Are we going:
a) to consider that the new common shares (step 3) are issued as part of the exchange of shares in course of reorganization of capital with the result that the ACB of the old shares will have to be pro-rated between the new common and new preferred shares and that ITAR 26(27) would not apply (creating a possibility of future capital loss)?
b) to deny to rule on the reorganization on the basis that it was done to circumvent the provisions of section 84.1?
Position: To rule favorably.
Comments: As the pre-1972 surplus will have to be distributed in dividends (crystallized in the new preferred shares of Opco), we should not object to an increase of the paid-up capital to the extent of the post-1971 surplus (crystallized in the new preferred shares of Newco on which a capital gain will be realized).
Chief Bilingual Services Section Bilingual Services & Finance Division Corporate Rulings Directorate Legislation Branch
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