9 January 1987 Income Tax Severed Letter 5-2377 - [Technical Interpretation of Subparagraph 2]

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.

XXXX
R.A. Primeau     
                                     (613) 957-2127 

XXXX

January 9, 1987

Dear Sirs:

Re: Technical Interpretation of Subparagraph 2XXXX(k)(iii) I.T.A.

This is in reply to your letter of October 21, 1986.

You have asked for our technical interpretation of the expression "other than, shares" which appears in parentheses in subparagraph 2XXXX(k)(iii) of the Income Tax Act (the "Act"). You note that this expression is not completed by the words "of the capital stock of the corporation" or by the words "or a right to receive any such shares" as is the case in paragraph 85(1)(b) of the Act, and ask whether such omission signifies that subparagraph 2XXXX(h)(iii) envisages a consideration in shares of a corporation other that the subsidiary transferee. You also ash whether a right to receive these shares is necessarily assimilated to a consideration other than shares.

The addition in 1981 of paragraph 2XXXX(k) to the Act originated with paragraph (74) of the Ways and Means Motion which was tabled in the house of Commons on April 21, 1980. That paragraph states that the branch tax base should "be reduced by the amount, if any, by which the fair market value of the property transferred exceeds the aggregate of the amount of the paid-up capital of the shares issued and the fair market value of any other consideration given by the subsidiary in respect of such property."

It is clear from the above that the drafters of the legislation intended that the word "shares" contained in the parentheses in subparagraph 2XXXX(k)(i of the Act imply the meaning "shares of the capital stock of the purchaser corporation." In our view, such an implied meaning has in fact been achieved by the context of the words contained in paragraph 2XXXX(k), namely, the earlier use of the longer expression "shares of the capital stock of the purchaser corporation" both in the preamble of paragraph 219(l)(k) and particularly in subparagraph 2XXXX(k)(ii) which immediately precedes and is complemented by subparagraph 2XXXX(k)(iii). The interpretation of the word "shares" in the parentheses in subparagraph 219(l)(k)(iii) as including shares of a corporation which is not the subsidiary transferee corporation would be inconsistent with the above-mentioned clause in the Ways and Means Motion and the context of paragraph 2XXXX(k), and would lead to the ludicrous result of having consideration given by the subsidiary transferee corporation in the form of shares of another corporation not being accounted for at all, i.e. in either subparagraph 2XXXX(k)(ii) or (iii), for no apparent reason.

With regard to your comparison of subparagraph 2XXXX(k)(iii) with paragraph 85(1)(b) of the Act, we would point out that in the latter the words "of the capital stock of the corporation" could not be implied since although they are used in the preamble of subsection 85(1), they are not used in a paragraph which immediately precedes and is complemented by paragraph 85(1)(b). Furthermore, the words "of the capital stock of the corporation" are in fact needed in paragraph 85(1)(b) to give clear meaning to the immediately following words "or a right to receive any such shares" (underlining ours).

Based on the above, we do not think that the words "or a right to receive any such shares" can be implied, from the context of paragraph 2XXXX(k), after the word "shares"(which as stated above implies the meaning "shares of the capital stock of the purchaser corporation") contained in the parentheses in subparagraph 2XXXX(k)(iii), nor does the above-mentioned paragraph in the trays and Means Motion support such an interpretation. Furthermore, such an interpretation would again lead to the ludicrous result of having consideration given by the subsidiary transferee corporation in the form of rights to receive shares not being accounted for at all, i.e. in either subparagraph 2XXXX(k)(ii) or (iii), for no apparent reason.

To summarize, the fair market value of consideration given by the subsidiary transferee corporation which is either in the form of shares of another corporation or in the form of rights to acquire shares (of any corporation) must be taken into account in subparagraph 2XXXX(k)(iii) of the Act.

We trust that the above satisfactorily answers your queries.

Yours truly,

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