11 February 1986 Income Tax Severed Letter 5-0303 - [Paragraphs 85(1)(e) and 55(3)(b) of the Income Tax Act]

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.

D. Holtz (613) 993-6201

February 11, 1986

Dear Sirs:

Re: Paragraphs 85(1)(e) and 55(3)(b) of the Income Tax Act (the "Act")

This is in reply to your letter of December 17, 1985 concerning the interpretation to be given paragraph 85(1)(e) of the Act when a transaction carried out pursuant to subsection 85(1) is one of a series of transactions to which paragraph 55(3)(b) of the Act applies.

To illustrate, you pose the following hypothetical example:

1. X Co. is owned 50% each by A Co. and B Co.

2. X Co. has one depreciable asset with a capital cost, undepreciable capital cost ("U.C.C.") and fair market value ("F.M.V.") as follows:

Capital Cost $100 U.C.C. $ 80 F.M.V. $200

3. For purposes of a "single-wing butterfly" A Co. is to receive a 50% interest in the asset, utilizing the provisions of subsection 85(1) of the Act.

4. When a significant purchase of shares of the transferor has occurred since the transfer property was acquired by the transferor, the consideration should equal the fair market value of the transfer property at the time of the purchase of the shares. If the last significant purchase was before January 1, 1972, then the consideration should equal the V-Day value of the transfer property.

Capital cost allowance claimed subsequent to the date of the significant purchase may reduce the consideration otherwise determined to the extent it has not contributed to unutilized losses. When the transferor is a corporation whose shares are widely held and traded, the consideration should equal the fair market value of the transfer property.

If there have been multiple significant purchases of shares of the transferor by the same purchaser since the transfer property was acquired by the transferor, and if the transferor is wholly owned by that purchaser, the consideration on the transfer should equal the aggregate of the percentage of shares purchased times the fair market value of the transfer property at the date of each significant purchase.

5. In some cases there will be a dividend paid to the parent by the transferor equal to the consideration received from the transferee or a subsection 84(3) deemed dividend on a redemption or cancellation of shares of the transferee taken as consideration by the transferor. Such dividends or deemed dividends will be subject to the application of subsection 55(2) if the dividend is part of a transaction or event or a series of transactions or events that is described in paragraph 55(3)(a).

Since problems can arise upon a review of specific sets of facts and as the guidelines herein are under review, a taxpayer considering a series of transactions based on the guidelines should apply for an advance income tax ruling.

Yours truly, A/Chief Corporate Reorganizations Section Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch