17 March 1990 Income Tax Severed Letter ACC9041 - Review of Corporate Reorganizations Course Material

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.

R.D. Snider                           Specialty Rulings
Section Chief                           Directorate
Advanced Audit 6  Investigations      S. Leung
Training Programs  Section            957-2116
Centre for Careen Development

Attention: D. Sturtevant

Review of Corporate Reorganizations Course Material - Lesson 3 Capital Reorganization

This memorandum is in response to yours of April 3, 1990 wherein you requested our technical review of the Corporate Reorganizations course material comprising the Instructors Lesson Plan and the Participants Package. This memorandum contains our comments on the course material with respect to Lesson 3.

Our comments are as follows:

Section 51

1. We understand that both IT-115R and IT-450 are in the process of being revised. The revised IT's may not contain the administrative practice regarding the receipt of non-share consideration of less than $200 instead of a fraction of a share as described in section 1.2 of the course material. This comment, therefore, may need to be updated once the revised bulletins are issued.

2. While the first sentence of the third paragraph of section 1.3 is correct for paragraphs 51(1) (a) and (b), paragraph 51(1) (c) is only applicable for exchanges occurring after November 21, 1985.

3. The fourth paragraph of section 1.3 makes a reference to TR-66. The TR series have been cancelled and can no longer be relied on as representing departmental practice.

4. Under section 1.4 of the course material, the following is stated in paragraph 5: "The net effect is a deferral of any capital gain or loss on the exchange except to the extent of the benefit". While we agree that the above statement is correct with reference to the capital gain, we do not concur that the net effect of section 51 of the Act is a deferral of any capital loss ... except to the extent of the benefit. We feel that no matter what the amount of the benefit is, all of the capital loss, if any, would be deferred by virtue of the operation of paragraph 51(2)(e) of the Act.

Section 86

5. Since TR's 50 and 68 have both been cancelled, it is our view that the reference to those rulings in the first paragraph of section 2.2 is not appropriate. The point that a conversion of common shares into preference shares, and vice versa, constitutes a disposition can be made by reference to paragraphs 14(b), (c) and (d) of IT-448 .

6. Under section 2.2 of the course material and lesson plan, we feel that the statement "Unlike sections 51 and 85.1, non-share consideration, or boot, can also be received" is not totally correct in that subsection 85.1(3) permits the receipt of non-share consideration.

Section 85.1

7. Under section 4.2 of the course material and lesson plan, we feel that the following statement, which appears in the second paragraph on page 7.2, does not reflect the Department's practice.

"For each class of shares given up, only one class of shares can be received". It is the Department's practice that a vendor may receive shares of one class for some exchanged shares and shares of another class or of another series of the same class for other exchanged shares. Subsection 85.1 may be utilized in respect of each exchange as long as the applicable documents clearly set forth the manner in which shares were exchanged for each class or series of shares received. This will apply regardless of whether the exchanged shares are all of one class or are of more than one class. Refer also to the second sentence in the last paragraph of the answer to question 3 on page 26 of the Lesson Plan.

However, the last sentence of the last paragraph of the answer to question 3 on page 26 of the Lesson Plan is not exactly correct in that the Department has given favourable rulings on subsection 85.1(1) in respect of share exchanges where a fraction of a share was exchanged for one class of shares and the other fraction of the same share was exchanged for another class of shares provided that the applicable documents clearly set forth the manner in which each fraction of the share was exchanged for which class or series of shares received. Refer also to the second sentence of paragraph 5 of the Special Release to IT-450 .

8. On page 7.2, paragraph 4, please refer to our comment 1 with respect to the administrative practice concerning the receipt of non-share consideration of less than $200 instead of a fraction of a share.

9. We do not feel that paragraph 85.1(2)(b) of the Act contains an extended definition of "arm's length" as stated in the last paragraph under "Shares of a Canadian corporation" in section 4.2 of the course material. This paragraph merely describes a set of circumstances in which subsection 85.1(1) will not apply.

10. In the fifth sentence of the second paragraph of section 4.4 of the course material, we suggest that the words "PUG of the share" be deleted and replaced with "the deemed dividend that would otherwise have been paid" in the sentence "The amount of the reversal at any given times the amount by which all such dividends, past and present, that have been paid on that class exceed the PUG of the shares without the grind under paragraph (a)".

11. Under section 4.4 on page 18 of the Lesson Plan, it appears that the reference to paragraph 85.1(1) (a) in the question section should be a reference to paragraph 85.(1)(1).

Questions and Answer

12. Under Option (c) of the answer to Question 3, if the PUG of each Target Co. Ltd. common share is less than $1.00, subsection 85(2.1) would apply to grind the PUG of the redeemable preferred shares. We would, therefore, suggest that the question state that the PUG of the common shares of Target Go. Ltd. is $1.00 per share.

Since we have not received a copy of the overheads and other teaching materials, we cannot offer any comments on these materials.

for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch