21 August 1991 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.

AUDIT PROGRAM DIRECTORATE               BILINGUAL SERVICE AND
SCIENTIFIC RESEARCH                       RESOURCES INDUSTRIES
Audit section                             Division
                                        A. Payette
Attention:  W.A. Fulton                 957-8974

24(1)

Exemption from Tax per Paragraph 149(1)(d)

This is in response to your memorandum of July 15, 1991 in which you requested our opinion as to whether 24(1) is exempt from tax pursuant to paragraph 149(1)(d) of the Income Tax Act (the "Act"). Should 24(1) be exempted from tax, it will not be eligible for the refundable investment tax credit pursuant to subsection 127.1(1) of the Act for its 1989 taxation year.

The facts are as follows:

1.

2.             24(1)

3.

4.

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You further state as follows:

We have carefully reviewed IT-347R , particularly par 1,2, and 7, but still have not reached a conclusion. Pursuant to par. l ,and 2, it would appear that 24(1) could be exempt from tax."

OUR OPINION

Paragraphe 149(1)(d) of the Act provides that

"No tax is payable under this Part upon the taxable income of a person for a period when this person was

(...) (...) (...)

          (d)  a corporation, commission or association not less
               than 90% of the shares or capital of which was
               owned by Her Majesty in right of Canada or a
               province or by a Canadian municipality, or a
               wholly-owned corporation subsidiary to such
               corporation, commission or association but this
               paragraph does not apply

          (i)...

          (ii)...;"

The second part of paragraph l of IT-347R states that an exception to the wholly-owned rule for subsidiaries may occur where the incorporating legislation provides that all property acquired and held by a tax-exempt corporation is vested in Her Majesty in right of a province. Her Majesty is then considered to own all the assets of the corporation, including any shares of a subsidiary. It follows from this that the subsidiary would qualify as a tax-exempt corporation under paragraph 149(1)(d) if 90% or more of its shares were held by the corporation and thus vested in Her Majesty.

          24(1)

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24(1)

ADDITIONAL COMMENTS

                         24(1)

Paragraph 11 of IT-293R , SPECIAL RELEASE states:

"...Where a debtor corporation issues its own shares to a creditor in settlement of a debt, the provisions of section 80 do not apply if the fair market value of the shares at that time is not less than the principal amount of the debt, but section 80 will have application to the corporation where the fair market value of the shares is less than the principal amount of the debt then outstanding...

In situations where an amount owing to a shareholder by a corporation is extinguished by being contributed by the shareholder to the corporation in the form of a capital contribution, the Department considers that section 80 is applicable on the full amount of the loan extinguished."

In our view, subsection 80(1) would be applicable provided that paragraphs 80(1)(c) to 80(1)(h) do not apply.

We hope our comments will be of assistance to you.

Acting Chief Bilingual Services- Section 32 Bilingual Services and Resource Industries Division Rulings Directorate

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