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3 October 1980 Income Tax Severed Letter RCT 7-532 F Unedited CRA Tags 85(1), 56(4) RE:     XXX Fractional Shares Received as Consideration for Property Transferred under Subsection 85(1)of the Income Tax Act (the Act) This is in reply to Mr. ... Subsection 85(1) of the Act contemplates the issuing of shares from treasury of a corporation, to form at least part of the consideration to be taken back. XXX XXX There, we are of the view that these elections are invalid on the grounds that a share was not received as part of the consideration for the property transferred. ...

Your administrative practice, as I understand it, has been to allow a purchaser to obtain a fair market value basis and a vendor to obtain a rollover, in respect of a fraction of a share acquired by the purchaser corporation, where a combination of shares and other consideration has been received from the purchaser corporation. This treatment is only available where the purchaser has allocated the share consideration to a specific fraction of each share acquired. As a result of the amendments to section 85.1, a purchaser may choose not to allocate the share consideration given by it to any fraction of the shares acquired from the vendor in order that section 85.1 will not apply to the acquisition. ...

The husband transfers his shares of the Opco to a Holdco pursuant to subsection 85(1) of the Act, presumably for consideration that includes at least one share of Holdco. ... The effect of the application of subsection 84.1(1) will depend on the paid-up capital, within the meaning of paragraph 89(1)(c) of the Act ("PUC"), of the transferred Opco shares and the Holdco shares issued as consideration, and on the value of any non-share consideration received by the husband from Holdco for his Opco shares. ...

The Partnership assumed the Mortgage and paid for the land by way of an agreement for sale; (c) It is now proposed that the land be transferred back to the Company and the Partnership be liquidated pursuant to Section 85(2) and Section 85(3) of the Income Tax Act; (d) On the transfer under Section 85(2), it is proposed that the consideration to the Partnership for the transfer of the land be a combination of the assumption of the Mortgage, preferred shares equal in value to the adjusted cost base of the Partnership interests of the partners in the Partnership, and common shares equal to the balance up to the fair market value. In our view, the adjusted cost base of the preferred shares to the partner after the distribution of those shares from the Partnership to the partners is not reduced under the provisions of paragraph 85(3)(e) of the Act by the amount of the Mortgage assumed, as the assumption of the Mortgage by the company does not represent consideration received by a partner for the disposition of his interest in the partnership. ... In addition, in our view, in order to qualify under the provisions of subsections 85(2) and (3) of the Act all the property of the Partnership must be disposed of to one corporation (the corporation) and immediately before the winding-up of the Partnership, there must be no partnership property other than money or property received from the corporation as consideration for the disposition of its assets. ...

An acquisition of shares in the subsidiary for nominal consideration followed by a separate cash contribution. 2. An acquisition of shares of the subsidiary corporation for a total cash consideration equal to the subscription price including the cash contribution in the first situation. ... In the second situation, the cost of the shares acquired in the subsidiary company, with whom the taxpayer is not dealing at arm's length, is subject to adjustment pursuant to paragraph 69(l)(a) of the Act resulting in a reduction of the cost to the extent of the fair market value of the shares, where the total consideration exceeds the total fair market value of the shares (which may be nominal due to accumulated losses). ...

Mitchell 957-2139 8-0041 RE: Employee Stock Appreciation Rights Paragraph 110(1)(d) Further to our memorandum of March 13, 1986, concerning the issue of stock appreciation rights ("SAR's") and paragraph 110(1)(d) of the Act, we wish to draw to your attention a further consideration in this context. ... Our resolution of that issue will be influenced by the underlying consideration of whether, if such a benefit does fall within subsection 7(1), the deduction provided for in paragraph 110(1)(d) would or should be available to an employee who simply receives cash payment directly pursuant to the terms of an agreement with his employer. ... We would draw to your attention that in the case of Greiner 84 DTC 6073, the Federal Court of Appeal held that a cash payment received in consideration for the surrender of stock option rights was taxable pursuant to paragraph 7(1)(b). ...

The husband transfers his shares of the Opco to a Holdco pursuant to subsection 85(1) of the Act, presumably for consideration that includes at least one share of Holdco. ... The effect of the application of subsection 84.1(1) will depend on the paid-up capital, within the meaning of paragraph 89(1)(c) of the Act ("PUC"), of the transferred Opco shares and the Holdco shares issued as consideration, and on the value of any non-share consideration received by the husband from Holdco for his Opco shares. ...

The above considerations also apply in determining whether a corporation is a "small business corporation" for the purpose of paragraph (a) of the "qualified small business corporation share" definition. ... Whether an asset is used in an active business is a question of fact that requires consideration of all the circumstances of the situation. The comments set out in this letter are of a purely general nature and do not take into account considerations that might arise in the context of a specific transaction. ...

The Partnership assumed the Mortgage and paid for the land by way of an agreement for sale; (c) It is now proposed that the land be transferred back to the Company and the Partnership be liquidated pursuant to Section 85(2) and Section 85(3) of the Income Tax Act; (d) On the transfer under Section 85(2), it is proposed that the consideration to the Partnership for the transfer of the land be a combination of the assumption of the Mortgage, preferred shares equal in value to the adjusted cost base of the Partnership interests of the partners in the Partnership, and common shares equal to the balance up to the fair market value. In our view, the adjusted cost base of the preferred shares to the partner after the distribution of those shares from the Partnership to the partners is not reduced under the provisions of paragraph 85(3)(e) of the Act by the amount of the Mortgage assumed, as the assumption of the Mortgage by the company does not represent consideration received by a partner for the disposition of his interest in the partnership. ... In addition, in our view, in order to qualify under the provisions of subsections 85(2) and (3) of the Act all the property of the Partnership must be disposed of to one corporation (the corporation) and immediately before the winding- up of the Partnership, there must be no partnership property other than money or property received from the corporation as consideration for the disposition of its assets. ...

With the exception of CCO, the Taxpayers acquired their Exchangeable Shares on XXXXXXXXXX, in consideration of their transfer to ACO of their Units. ... DCO acquired these Exchangeable Shares on XXXXXXXXXX, in consideration of its transfer to ACO of its Units. ... The relevant Taxpayer will receive, as consideration for the Exchange, the Exchange Consideration, which will consist solely of BCO Shares. ...