Section 52

Where surplus from an individual pension plan trust (IPP) is distributed as an in-kind distribution to the sole member, what is the cost to the member of property thereby received from the IPP?

After noting that the questions were relevant to any registered pension plan (RPP), not just an IPP, and that the in-kind distribution would constitute the disposition and acquisition of the distributed property occurring at its fair market value (FMV) at the time of the distribution, and that such amount would be included in the member’s income under s. 56(1)(a)(i), CRA then indicated that, pursuant to s. 52(1), the FMV of the property that was included in computing the member’s income would be deemed to be the cost to the member of such property.

S. 52(1) does not deem a promissory note issued to a shareholder in payment of a capital dividend to have a cost equaling the dividend amount (as the dividend was not included in the recipient’s income). Does that matter?

CRA responded:

Our Directorate is generally of the view that the cost of a promissory note, received as full and absolute payment of a dividend for which the election under subsection 83(2) has been made, equals the principal amount of the promissory note, thereby achieving a result more consistent with the role of subsection 83(2) under the integration scheme embodied in the Act.

After finding that the value of a share purchase warrant granted to an asset vendor by the parent of the purchaser, as an inducement to enter into a services agreement with the purchaser for a quite long term, was includible in the vendor’s income under s. 12)1)(x), the Directorate stated:

For the Taxpayer, subsection 49(3) will apply at the time the option under the warrant is exercised. Under subsection 52(1), the cost of the warrant will reflect the amount included in income pursuant to paragraph 12(1)(x).

Publico determined to grant stock options to its directors and consultants, as a result of which a private corporation ("Corporation"), that had provided consulting services, was entitled to receive a grant of options. However, such options instead were granted directly to an individual sole shareholder of Corporation, who subsequently exercised and sold the acquired Publico shares, reporting a capital gain.

After determining that there was a s. 15 benefit to the shareholder at the time of her exercise of the options (being the excess of the fair market value of the acquired shares over the exercise price), the Directorate stated:

In so far as the shares in the capital stock of Publico acquired are capital property to Ms. X, the amount of the benefit … would be added in the computation of the cost of the shares, to Ms. X, under subsection 52(1). The cost of the shares for Ms. X should also include the exercise price of the options … .

An estate sold personal-use real estate to one of its beneficiaries for a price less than the property's fair market value, so that s. 69(1)(b)(i) applied. The capital gain to the estate was payable to a beneficiary other than the purchaser.

CRA rejected a submission - that the exception in s. 105(1)(a) applied to exclude a taxable benefit to the purchaser because later in the same year the purchaser sold the property at a capital gain which was increased by the amount of the purchaser's reduced cost for the property. Accordingly, that difference represented a taxable benefit to the purchaser, but such amount was required to be added to the purchaser's adjusted cost base under s. 52(1) – with a resulting reduction in the capital gain on the subsequent sale.

Opco sold the property of its former business to one of its shareholders at an undervalue, without any change to Opco’s share capital. The Directorate stated:

[S]ubsection 52(1) would apply. Consequently … the amount that would be included in computing X's income pursuant to subsection 15(1) or 246(1) would be added in computing X's cost of the property acquired from Opco.

CCRA indicated that where a permanent life insurance policy was distributed gratuitously by a private corporation to a shareholder, who was deemed under A of the ACB definition in s. 148(9) to have acquired the policy for its cash surrender value, and who was deemed to have an s. 15(1) inclusion equal to the policy’s FMV, the amount of the excess of the FMV of the policy over its ACB was to be added to the ACB of the policy to the shareholder – so that the policy’s ACB consequent on the transfer would should be equal to its FMV.

When an amount was included in the income of an initial subscriber for a share of a corporation on the basis that the nominal subscription price was less than the fair market value of the share, the amount of the resulting benefit under s. 15(1) or 246(1) generally would be added to the ACB of the share to the purchaser pursuant to s. 52(1).

Where an amount was included in a shareholder’s income under s. 15(1) on the grant to it of options to acquire the corporation’s shares, the benefit would be added to the options’ cost to it pursuant to s. 52(1).

The amount included in income under s. 12(9) in respect of a prescribed debt obligation is added in computing the cost to the investor of that instrument under s. 52(1).

Amounts included in income each year in respect of a prescribed debt obligation will be added in computing the adjusted cost base of the prescribed debt obligation.

A reorganization with a distribution entailed the shareholders of a Mexican company listed on an exchange (“Mexco”) being issued shares in of another company listed on the same exchange (the "Distribution Shares"). After noting that this reorganization did not qualify under s. 86.1 because Mexco did not own the Distribution Shares before their issuance, CCRA went on to note that the FMV of the distribution was included in a Canadian shareholder’s income under s. 90 and the ACB of the distributed shares was their FMV pursuant to s. 52(2)., a corporation also listed on the stock exchange.

CRA indicated that where a dividend in kind paid by a corporation is subject to s. 55(2), the dividend recipient will be considered to have acquired the distributed property at a cost under s. 52(2) equal to its fair market value. CRA stated:

It would not be logical to say that a property received as a dividend in kind that was subject to the application of subsection 55(2) because its purpose was to increase cost or to reduce gain because of the increase in cost would, in turn, not have a cost.

(This position reverses 9830665.)

A corporation (“Holdco”) holds a policy on the life of its sole shareholder with an adjusted cost basis (“ACB”), cash surrender value (“CSV”) and fair market value (“FMV”) of $200k, $240K and $450K, respectively. If Holdco transfers the policy to its shareholder as a dividend in kind, its proceeds of disposition (and his cost) will be only the CSV of $240K (so that its gain is $40K), since the FMV of the consideration received by it is nil.

CRA did not mention s. 52(2).

Background

Pubco (a Canadian public company) wishes to spin-off Canco and Forco1 (a foreign affiliate) to its shareholders without incurring the expense of a plan of arrangement or holding a shareholders' meeting.

Proposed transactions.

1. Pubco will incorporate Newco (a taxable Canadian corporation) and subscribe for common shares.
2. Pubco will transfer its shares of Canco and Forco1, and a loan owing by Forco1, to Newco mostly in consideration for interest-bearing notes of Newco - as well as the issuance of preferred shares with a nominal redemption amount and subject to a price adjustment clause. The agreed amount in s. 85(1) elections will be the fair market value of the transferred properties.
3. Pubco will declare and pay a dividend-in-kind to its shareholders consisting of the Newco common shares.
4. Pubco will lend cash to Newco for an interest-bearing note.
5. "To facilitate the payment of the Part XIII tax associated with the dividend in kind, PUBCO will cause Newco to repurchase shares of its capital stock from the affected shareholder with a value equal to the amount of the withholding tax owing, which will then be remitted to the CRA."

Rulings

• Subject to s. 69(11), s. 85(1) will apply to the transfer in 2.
• Per s. 52(2), Pubco will dispose of the Newco shares for their fmv and its shareholders will be deemed to acquire them at the same amount, which will also be the amount of the taxable dividend.
• S. 84(3) deemed dividends will arise in 5 based on any excess of the repurchased shares' fmv over their PUC.

CRA indicated that since Finance’s intent is to give cost to the portion of the stock dividend that is supported by safe income, and also to a portion of the stock dividend that is technically subject to the application of s. 55(2), cost will be recognized under s. 52(3) for the amount of a stock dividend to which s. 55(2) has applied. (This position reverses 9830665.)

Where at the time a taxpayer acquires a unit in a unit trust the value of the unit includes income payable by the trust at year-end and realized capital gains, on a subsequent redemption of the units s. 52(6) will attribute a cost to the right to receive the income and capital gains equal to the amount received in satisfaction of that right, and no gain or loss will arise.