Section 69

Canco advances the Loan to a related charitable foundation. The Loan is not issued at a discount and matures in X years. Are there any tax consequence to Canco to the Loan not bearing interest? CRA stated:

Where the cost of the Loan is less than the amount payable at maturity, there will be a deemed accrual under paragraph 7000(2)(a) of the Regulations. However, because the Loan was made between two non-arm's length parties, paragraph 69(1)(a)… may apply to reduce the cost of the Loan to Canco. If the Loan is not repayable at the demand of Canco, it is possible that the fair market value of the Loan could be less than the amount advanced by Canco under the Loan. If that is the case, then paragraph 69(1)(a)… could deem Canco to have acquired the Loan at a cost equal to the fair market value of the Loan, triggering the deemed accrual under paragraph 7000(2)(a)… .

The 100 units of a limited partnership (LP), which on an FMV basis has a deficit of $108,000 (i.e., liabilities of $110,000 and assets of $2,000), are held as to 99 and 1 by Partner Inc. and its wholly-owned subsidiary GP Inc., respectively. In order to pay off the bank debt, Partner Inc. subscribes for 100 units of LP for $100,000, so that such debt is discharged and the deficit reduced to $8,000.

Does such subscription represent an acquisition of property by Partner Inc. for purposes of s. 69(1)(a), or is it a "contribution of capital" for s. 53(1)(e)(iv) purposes? CRA responded:

[W]e believe that the partner, in consideration for the $100,000 payment, acquired a greater interest in the partnership by acquiring part of a property. We believe that subsection 69(1) could apply to the acquisition of part of a property, especially since the wording of that provision uses the word "anything".

CRA went on to note that the ACB of the LP units of Partner Inc. would have their cost increased under s. 69(1)(a) by an amount equal to the value of the 100 units issued (nil), but that the $100,000 “difference between the amount paid and the value of the units will be added to the ACB of the interest pursuant to paragraph 53(1)(e)(iv).”

Where Mr. A sold shares of Opco to a son and daughter in consideration for promissory notes that were non-interest bearing and repayable in annual instalments, the cost of the Opco shares acquired by the son and daughter were equal to the fair market value of the promissory notes, which was lower than the fair market value of the Opco shares. CCRA stated that:

"In various 'butterfly' rulings ... we generally accept, as a statement of fact from the particular taxpayer, that a non-interest bearing note that is payable on demand and issued as consideration for certain property acquired by the taxpayer may have a fair market value equal to its stated principal amount."

Ss.69(1)(a) and 80(1) both will be applied where a creditor accepts low fair market value shares in satisfaction of the debt previously owing to it.

A trust deed for a family trust (whose current named beneficiaries were family individuals) was to be amended by court order to expand the range of beneficiaries who could be added in the discretion of the trustees to include inter alia corporations which were wholly-owned indirectly by the family beneficiaries (previously, corporate beneficiaries could only be added if they were directly owned by family individuals). Following such amendment, the trustees would then exercise their discretion to add four corporations as beneficiaries, one of which was directly owned by two of the other corporate beneficiaries.

CRA ruled that (1) these transactions did not trigger a disposition of the trust property, (2) the obtaining of the amending court judgment would not result in a disposition of the interests in the trust of the existing beneficiaries and (3) that the addition of the corporate beneficiaries would not result in their receipt of proceeds of disposition including pursuant to s. 69(1)(b). It did not rule that such addition would not result in a disposition by the existing beneficiaries. The CRA summary states:

The addition of a new beneficiary to a discretionary trust by the exercise of a power to add such beneficiary in the trust deed results in a disposition, by the existing beneficiaries, of a portion of their interest in the trust. However, provided the existing beneficiaries do not direct to whom the interest is transferred, they would not be deemed to have received proceeds of disposition under paragraph 69(1)(b). This is also true for the trustee/beneficiary who, in this particular situation, is not considered to have control over the decision to add a new beneficiary.

CRA assesses corporation A under s. 56(2) and s. 69(1)(b) on a capital gain of $99,990 on the basis that it had exchanged preferred shares with a FMV of $100,000 for new common shares with a FMV of $10, thereby shifting value to the other shareholder (individual B) which was then realized by B on a sale to a third party. CRA indicated that these provisions

do not provide for a reimbursement obligation by a taxpayer where a benefit was allocated or when income was attributed to another taxpayer. …

An individual donates a real estate property with a fair market value of $200,000 that is charged with a hypothec of $100,000. After noting that under the applicable (Quebec) civil law "in order for there to be a donation, there must among other things be a donative intention," as to which CRA could not comment, and indicating that a real estate property is "a single" property, CRA stated (TaxInterpretations translation):

[I]f it is established that there was a donation agreement under the civil law, under subparagraph 69(1)(b)(ii) the proceeds of disposition of the property to the donor will be deemed to be equal to $200,000.

Under paragraph 69(1)(c), the cost of acquisition of the property to the donee of the gift with charge will be deemed to be equal to $200,000. …[T]he same interpretation would apply for 2016 and subsequent taxation years notwithstanding the amendment to that paragraph… .

Does s. 69(1)(b)(ii) apply only to individuals? CRA indicated that the interpretation of the term "gift inter vivos" is not a tax issue but a matter of provincial private law, stating that in the absence of an express contrary provision or sham, "the legal relations created by the parties must be respected in tax matters."

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.

A Canadian-resident taxpayer who lived outside Canada made a transfer without consideration (the "Gift") to her adult children of a building and subjacent land situated in France (the "Building"), which had appreciated subsequent to its acquisition by the taxpayer. The Gift was made as a shared gift (donation-partage) in accordance with s. 1075 of the French Civil Code ("C.c.f."), with the taxpayer reserving, as permitted by s. 949 of the C.c.f., a usufruct in her favour during her lifetime (the "Arrangement"), so that she was entitled to all the income from the Building.

After noting that the creation of a usufruct governed by the C.c.f. did not give rise to a deemed trust under s. 248(3), CRA stated (TaxInterpretations translation):

… the Taxpayer is deemed to have disposed of the Immovable for consideration equal to its FMV and that her children were deemed to have acquired the property for the same amount, all in accordance with the provisions of paragraphs 69(1)(b) and (c). We understand that the proceeds of disposition will be equal to the eventual excess of the FMV of the Immovable at the time of the Gift over the FMV of the Arrangement and any other rights and obligations relating to or encumbering the Immovable at that time.

CR also found that s. 43.1(1) applied, indicating that the taxpayer is deemed to have disposed of her usufruct right respecting the Immvable for proceeds equal to its FMV at the time of its creation, and to have acquired it, immediately after that time, at a cost equal to such deemed proceeds of disposition.

A partnership was leasing property from a partner, and then is wound up as described in s. 98(5), with the former partner continuing to use the particular property in the business of the terminated partnership. If the leasehold interest is extinguished by merger, s. 98(5) would not apply to the leasehold interest. The terminated partnership would be considered to have disposed of its leasehold interest for nil proceeds of disposition (having regard to the BCN case, 79 DTC 5068), thereby resulting in a terminal loss.

A CCPC ("Opco"), whose voting common shares were owned by two individuals (B and R) and by a Canadian-controlled private corporation ("M Holdco") wholly owned by a third individual ("M"), purchased for cancellation all of its shares (having nominal paid-up capital and adjusted cost base) held by M Holdco. This was a non-arm's length transaction. The safe income on hand was in excess of the purchase price, so that all of the purchase for cancellation was reported as giving rise to a deemed dividend under s. 84(3) that was not subject to s. 55(2). CRA determined that the purchase price for the shares was less than their fair market value, and that a price adjustment clause was invalid as there was no intention at the time for the transaction to occur at the shares' fair market value.

The Directorate indicated that the shares were deemed by s. 69(1)(b) to be disposed of for their fair market value. Such proceeds were reduced by the deemed dividend arising under s. 84(3), which was based on the actual amount paid rather than being modified by the application of s. 69(1)(b). Accordingly, none of the unutilized safe income on hand attributable to the shares could be utilized, and a capital gain arose to the extent of the s. 69(1)(b) adjustment.

Corporation A, an operating company, lent money to Corporation B, its holding company which Corporation B used to purchase a building. Corporation A then forgives the debt to Corporation B. CRA stated:

Even when a debt was acquired for the purpose of earning income from a business or property, subparagraph 69(1)(b)(i) presumes, except as expressly otherwise provided in the Act, that where a taxpayer disposes of anything to a person with whom the taxpayer was not dealing at arm's length for less than the fair market value thereof, the taxpayer shall be deemed to have received proceeds of disposition equal to that fair market value. ... As a result...the deemed proceeds of disposition would be the fair market value of the loan which could mean that no loss on the disposition of a debt would be allowed to the lender.

Upon the incorporation of Opco, X subscribed for and continued thereafter to hold all the Class A voting participating shares of Opco, whose terms provide for a participating dividend. At that time or thereafter, a Holding company owned by X, or X’s spouse, subscribed a modest amount for Class B non-voting participating shares so that dividends thereon may accomplish a creditor-proofing or income-splitting objective.

CRA noted that it could consider that Opco had conferred a s. 15(1) benefit on the subscriber to the Class B shares if their fair market value was higher than the subscription price. Alternatively, there might be circumstances (referred to in the summary as the situation where “the benefit is conferred by a shareholder rather than by the corporation,” i.e., by X rather than Opco) where CRA would apply s. 69(1)(b) and Kieboom on the basis that X had disposed of an interest in Opco to the Class B share subscriber for the FMV of that interest – which, in turn, could engage s. 74.1(1) where the subscriber was X’s spouse.

CRA indicated that the renunciation of a capital interest in a discretionary family trust would give rise to nil proceeds of disposition, stating (per its summary):

Subsection 69(1) does not apply because the disposition is not to any person.

The sole trustee (the Trustee) of a family trust who also was one of the "Existing Beneficiaries" exercised a power under the Trust Indenture to add beneficiaries to the Trust who were unrelated to the Existing Beneficiaries. The Trustee then resigned and a replacement trustee became trustee. The Trust protector then removed the replacement trustee and appointed a corporation resident in Canada as trustee.

After noting that the interest of the beneficiary of a discretionary trust "is essentially a right… to be considered by the trustee as to whether or not any trust property…should, in the trustee's discretion, be distributed…see Gartside v. I.R.C., [1968] A.C. 553 (HL)," CRA stated:

When additional beneficiaries are added to a trust, whether as a result of a variation of the trust or pursuant to the terms of the trust, the rights of the existing beneficiaries...are arguably diminished and as a result, each of the existing beneficiaries realizes a disposition of a part of the bundle of rights that forms his or her interest in the discretionary trust….[However,] the addition of the New Beneficiaries will not result in any actual or deemed proceeds of disposition in respect of that disposition other than to the Existing Beneficiary who is the trustee of the Trust.

However, as the trustee

is also a beneficiary of the Trust who has realized a disposition of a part of his interest in the Trust as a result of the addition of the New Beneficiaries, we believe that a reasonable argument can be made to apply subparagraph 69(1)(b)(ii) to the portion of his interest that has been disposed….[W]e suggest that you contact the Valuation Services Section….

Mrs. X, who owned a duplex, 2/3 of which was her principal residence and 1/3 of which was rented to a third party, made a gift of the duplex to her grandson. CRA indicated that in allocating the deemed proceeds under s. 69(1)(b) between the principal residence and rental portions:

Regardless of the method used to allocate the acquisition cost and proceeds of disposition of the building to the leased portion (generally based on the total area of the building), we are of the view that it is generally reasonable to allocate the acquisition cost and proceeds of disposition of the land using the same method.

Our position is that where, in a non-arm's-length situation, the fair market value of the shares exceeds the redemption amount, the difference will be taxed as a capital gain rather than as a deemed dividend. Paragraph 84(3)(a) speaks only of the "amount paid" where shares are redeemed. It does not stipulate fair market value payment or the lack of fair market value payment or even the necessity for one as opposed to the other; only that the amount paid in excess of the paid-up capital of the shares redeemed shall create a deemed dividend. Furthermore, although paragraph 69(1)(b) deems a taxpayer to have received proceeds of disposition equal to the fair market value of the property transferred in a non-arm's length situation, it does not apply to adjust the "amount paid".

What are the tax consequences of the renunciation by the beneficiary of a testamentary spousal trust of all entitlements under the trust (other than income that has accrued to date) without consideration and without having indicated who was entitled to benefit from the renunciation? CRA indicated that the beneficiary would generally not be considered to have received proceeds of disposition for the beneficiary’s income and capital interest and, since the renunciation was not made to a person, s. 69(1) would not apply.

Respecting the situation where a subsidiary purchases for cancellation a portion of the common shares in its capital held by its wholly-owning parent, CRA noted that s. 69(1)(b) would apply only for capital gains purposes and not for purposes of determining the amount of a deemed dividend under s. 84(3), given that the presumption in s. 69(1)(b) applied only with respect to the person disposing of property.

When asked whether the demolition of a rental property would trigger a disposition at fair market value, the Directorate indicated that the demolition would give rise to a disposition with nil proceeds, although in general s. 13(21.1)(b) would restrict the deduction of the resulting terminal loss to half of the amount otherwise calculated.

CCRA noted that if a spouse elected out of the application of s. 73(1) to the transfer of property to her divorced husband pursuant to an agreement ratified by the divorce court, then the application of s. 69(1)(b) to her proceeds would not result in a corresponding addition to the cost of the transferred property to her spouse and, conversely, if the transferee spouse paid more than the transferred property’s fair market value so as to result in the transferee’s actual cost being reduced to the acquired property’s fair market value, there would be no corresponding reduction to the proceeds of the transferor spouse.

Parentco elected under s. 50(1) respecting its shares of one of a wholly-owned subsidiary ("Lossco") with non-capital loses but no assets or liabilities. It subsequently sold its Lossco shares to a profitable wholly-owned subsidiary ("Profitco") for nominal cash consideration, with Lossco then being wound-up into Profitco under s. 88(1) so that Profitco could then access Lossco's non-capital losses pursuant to s. 88(1.1).

After finding that the s. 50(1) election likely was unavailable, the Directorate indicated that the sale of the Lossco shares likely generated a capital gain under s. 69(1)(b) given that “the valuation of those shares should normally take into account accumulated tax losses that may eventually be deductible in calculating a corporation's taxable income, as stated in question 5 of the 1992 APFF Conference Roundtable.”

A CCPC (Opco) paid a stock dividend of preferred shares with a fair market value of $800,00 and a paid-up capital of $80 to its sole shareholder, Mr. A, whose shares, being 100 common shares until then were estimated to have an FMV of $800,100. Immediately thereafter, a trust for the minor children of Mr. A subscribed $1,000 for 1,000 Opco common shares. Following audit, CCRA determined that the common shares of Mr. A had had an FMV of $1,000,100. CCRA stated:

[T]he CCRA could consider that, as a result of the trust's subscription for common shares of the corporation for less than their FMV, Mr. A would have disposed of property for consideration equal to the decrease in the FMV of the common shares he held, pursuant to paragraph 69(1)(b).

A and B, who were the equal common shareholders of Opco, each had personal holding companies (Holdco A and B) form an equally owned holding company (Portfolioco), which subscribed a nominal amount for newly-created Class K non-voting discretionary-dividend shares of Opco. Thereafter, dividends corresponding to the surplus cash accumulated in Opco were paid annually on the Class K shares, and distributed in turn by Portfolioco to the two Holdcos.

Regarding the potential application of s. 69(1)(b), CCRA stated:

[T]he issuance of the Class K shares of Opco for less than fair market value, could, depending on the circumstances, result in a disposition by Mr. A and/or Mr. B of any right, interest or holding in Opco to Portfolioco pursuant to paragraph 69(1)(b)… [for deemed] consideration equal to the fair market value of the property disposed of. [See …] Kieboom ... .

Mr. X, who wholly-owned Canco, gifts, at a time that he is withdrawing from Canco’s management, 51% of his shares to his son (Mr. Y), who is a Canco employee. Alternatively, he gifts 5% of his shares to an arm’s length key employee.

CCRA indicated that generally s. 6(1)(a) generally would not apply to the gift to the son if the transfer “were made solely because of the family relationship between Mr. X and Mr. Y,” and s. 69(1)(b) instead would generally be applicable. However, s. 6(1)(a) would apply in the second situation.

Although the issue is not referred to, the disposition of property by a corporation pursuant to the exercise of an option by a partnership of which the corporation was a general partner was considered to give rise to proceeds of disposition equal to the exercise price rather than the fair market value of the property.

A taxpayer disposes of depreciable property, having a UCC and capital cost to him of $300,000 and $400,000, respectively, to his son for a sale price of $300,000, and s. 69(1)(b) is applied to increase his proceeds of disposition to the property’s FMV of $450,000. When the son then disposes of the property for $400,000, s. 13(7)(e)(iii) deems him to have a capital cost of $400,000 and to have claimed CCA of $100,000, so that he realizes recapture of $100,000. However, s. 69(1)(b) did not increase his cost for capital gains purposes above his actual cost of $300,000.

The Directorate indicated that since his $100,000 gain was realized as business income (recapture), the parenthetical exclusion in s. 39(1)(a) would preclude the same amount being taxed as a capital gain.

A vertical merger between a US corporation with a Canadian branch business ("Absorbco") and its US parent ("Subco 3") under which Absorbco survives the merger, the US parent of Subco 3 exchanges its shares of Subco 3 for shares of Absorbco, and the shares of Subco 3 are cancelled, would qualify as a foreign merger. Subco 3, as the non-surviving corporation in this merger, will be considered to have disposed of all its assets and liabilities to Absorbco for their fair market value except that the shares of Absorbco instead will be disposed of by the non-resident parent of Subco 3 at fair market value. However, as the merger is described in Article XIII(8) of the US-Canada Convention, it is a transaction with reference to which the competent authority of Canada may enter into an agreement under s. 115.1.

S.69(1)(b) could apply to the granting of a non-exclusive licence of intellectual property to a related person.

Where shares bearing a non-cumulative dividend of 10% are exchanged on an s. 86 reorganization for shares bearing a non-cumulative dividend of 15%, the shareholder with the increased dividend rate will be considered to have received an s. 15 benefit, and other shareholders may be considered to have received fair market value proceeds under s. 69(1)(b).

An individual shareholder ("A") owns 20 preferred shares of a CCPC ("Opco") having a fair market value of $20 and an unrelated individual ("B"), who is the only other shareholder of Opco, owns 80 common shares having a fair market value of $1,000. If A exchanges his 20 preferred shares in Opco for 20 common shares of Opco pursuant to s. 51 or 86, he will receive a benefit under s. 15(1) and B, if he does not deal at arm's length with A, would be deemed to have received proceeds of disposition equal to the fair market value of B's economic interest given up in Opco.

In a response to several questions concerning the tax consequences to both the employee and the non-arm's length transferee where the transferee 1) sells the option in an arm's length sale, 2) exercises the option, 3) receives dividends on the shares, and 4) disposes of the shares in an arm's length sale, CRA stated:

With respect to paragraph 69(1)(b) of the Act, it is our view that it does not apply to an employee/transferor who is subject to the provisions of paragraphs 7(1)(c) or (d) of the Act by virtue of paragraph 7(3)(a) of the Act.

S.69(1)(b) would apply where a parent corporation owns patents, trademarks and copyright used exclusively by one of its subsidiaries in the subsidiary's world wide business without a fair market value fee being charged for the use of such intellectual property. The word "anything" extends to intangible property.

Where a company acquires from a person with whom it does not deal at arm's length an option to acquire property at a fixed price, s. 69(1)(b) "could be applied when the option is granted, if not granted at fair market value. However, the application may be more appropriate when the option is exercised. In our view, the benefit arising at the time of granting an option is often difficult to quantify ... ." Reference was made to IT-403R, para. 5-6.

S.69(1)(b) does not apply to the provision of services for less than their fair market value.

A conveyance will not be precluded from being considered a gift by the payment by the donee of $1 as a legal formality.

s. 69(1)(b) will apply to a purchase for cancellation of shares held by a non-arm's length shareholder for a purchase price less than fair market value. The proceeds for purposes of s. 40(1) will be reduced by the amount of the deemed dividend under s. 84(3), which is based on the actual amount paid by the corporation for the shares.

$1 consideration is specified in the legal documentation for a gift of property by a parent to a child solely to ensure the agreement is legally binding. Would s. 69(1)(c) apply, notwithstanding that nominal consideration of $1 would be paid? CRA stated:

In certain circumstances, the Canada Revenue Agency may be willing to accept that the transfer of property between non-arm’s length parties for the nominal amount of $1 could be considered a gift. For example, if the agreement governing the transfer provides for consideration of $1 merely to ensure that the agreement is legally binding, the CRA may consider the transfer to be a gift.

… If it is determined that the transfer of property was a sale for inadequate consideration rather than a gift, paragraph 69(1)(c) would not apply.

What is the cost (and amount incurred as an expense) for intellectual property with an unlimited life acquired by a corporation resident in Canada as a result of a return of capital from a wholly-owned foreign affiliate. Before concluding that for purposes of applying the eligible capital expenditure definition to the Canadian shareholder, the expenditure incurred by it would be considered to be equal to the FMV of the property at the time of its distribution, CRA stated:

[T]he cost of a property received by a corporation from its shareholder for no consideration, for example as a capital contribution, would…result in the corporation having a cost of the property equal to its FMV.

Does CRA consider, similarly to Revenu Québec, that a transfer of an immovable for $1 can be a gift? After referring to s. 8.1 of the Interpretation Act, which indicated that the concept of gift in Quebec was governed by the Civil Code ("C.C.Q."), CRA stated (TaxInterpretations translation):

The C.C.Q. provides for several types of gifts, such as pure and simple gifts, indirect gifts, disguised gifts, remunerative gifts and gifts with a charge. All these gits may be gifts for the purposes of the ITA.

Thus, the determination of the nature of a particular transaction, as sale or gift, must be made on the basis of the genuine legal relations between the parties. In the absence of an express provision to the contrary in the ITA or a finding that the transaction is a sham, the genuine legal relations must be respected in tax matters.

Could the acquisition of a property for consideration of one dollar qualify as an acquisition by gift for purposes of s. 69(1)(c)? The Directorate referred to the relevance of Quebec law per s. 8.1 of the Interpretation Act, and quoted the statement in s. 1806 of the Quebec Civil Code that:

Gift is a contract by which a person, the donor, transfers ownership of property by gratuitous title to another person, the donee.

After noting that the Civil Code contemplates different types of gifts (including "remunerative gifts and gifts with a charge [where only the net amount donated is considered a donation per s. 1810 CCQ]" and that all "such gifts can be gifts for purposes of paragraph 69(1)(c)," the Directorate stated (TaxInterpretations translation):

Thus, the determination of the nature of a particular transaction, to assess whether it is a true gift or sale, must be made on the basis of the legal relationships created by the contract of acquisition of the property. Indeed, in the absence of an express provision to the contrary in the Act or a finding of sham, the legal relationships created by the contract of acquisition must be respected for taxation purposes.

Editorial note: a donation contract in Québec is considered a unilateral contract by which property is transferred "by gratuitous title."

Respecting the determination of the cost of employee stock options to the estate of the deceased employee, CRA stated that it:

generally accepts that paragraph 69(1)(c) applies, so that the estate is deemed to acquire the options for their fair market value at that time. To the extent that the estate subsequently exercises the options and acquires the securities, the adjusted cost base to the estate of the options will be included by virtue of subparagraph 49(3)(b)(ii) in the calculation of the cost of the securities tor the estate.

After noting that a deceased employee would be deemed under s. 7(1)(e) to dispose of unexercised stock options at fair market value on death, CRA stated:

Where a deceased taxpayer's estate receives an employee stock option, we generally accept to apply paragraph 69(1)(c). Consequently, the option is deemed to have been acquired by the estate at a cost equal to its fair market value. ... In general, if an estate exercises an employee stock option, subparagraph 49(3)(b)(ii) will apply to add the adjusted cost base (ACB) of the option to the cost of the shares acquired under the option.

CRA indicated that an individual who donated land to an unrelated couple could be regarded as not dealing with them at arm’s length (stating that “the CRA generally assumes that two parties are not dealing at arm's length in a gift situation”), in which case, the transaction might be viewed as an inter vivos gift (so that the donees had full cost under s. 69)(1)(c)) or as a sale for $1 consideration (in which event, there would be no such cost to the donees). CRA stated:

[T]he terms used in the deed of gift, i.e., "the gift of real property" or "the sale for $1 of real property", would not have the effect of automatically limiting the application of the rules in subsection 69(1).

Where property is transferred to a trust for purposes of donating an equitable interest in the trust to a charity, the proceeds of disposition arising on the donation will be equal to the fair market value of the property at that time rather than the present discounted value of the equitable interest in the trust.

"Should the properties have been bequeathed or gifted, the ACB to the recipient will, by virtue of paragraph 69(1)(c), be the FMV at the time of transfer, whereas, if it is decided that the properties were sold for $1,000 each, the ACB will be $1,000, notwithstanding that the FMV was far in excess of that amount."

RC assumes, in the absence of clear evidence to the contrary, that an expropriation in a foreign jurisdiction has occurred in accordance with the laws of that jurisdiction. Accordingly, where property that previously was expropriated is returned to an individual that transaction will be governed by s. 69(1)(c).

See the diagram for the quite similar transactions ruled upon in 2016-0630761R3.

A Canadian-resident corporation (ACo) wished to transfer its shares of a foreign subsidiary (FA1) to a Canadian subsidiary of ACo (BCo). This was to be accomplished by ACo transferring its FA1 shares on a s. 85.1(3) rollover basis to a newly-formed non-resident subsidiary (New FA), with New FA then transferring its FA1 shares to BCo for a note – which then was to be repaid in cash out of share subscription proceeds from ACo, and with FA1 then distributing such cash to ACo (with a Reg. 5901(2)(b) designation being made). FA1 then is wound up.

In order to satisfy a CRA requirement that the cost to BCo of the FA1 shares (which were excluded property) be limited to the sum of their relevant cost base and the net surplus (being exempt surplus) of FA1 – rather than being stepped up to their higher fair market value, the note equalled such sum. S. 69(1)(c) deemed the proceeds to New FA to be the higher FMV. However, the FA1 shares were excluded property (not giving rise to FAPI), their exempt surplus was levitated under s. 93(1.11)(a) to New FA, and the note repayment proceeds were received by ACo out of pre-acquisition surplus and (to the extent of any amount that otherwise would be a negative ACB gain) out of New FA’s exempt surplus pursuant to s. 93(1.11)(b) and Reg. 5902(6).

CRA ruled inter alia:

Subsection 69(11) will not apply to the Proposed Transactions to deem ACo’s proceeds of disposition from the disposition of the FA1 Shares to New FA, as described in Paragraph 18, to be equal to the FMV of the FA1 Shares.

The CRA summary stated:

The “one of the main purposes” condition has not been met.

The taxpayer, a Canadian corporation, transferred all its voting and participating shares of Subco, a non-resident subsidiary wholly-owned corporation, to Forco (another controlled foreign affiliate) in consideration for shares of Forco. Forco also exercised an option to acquire IP from a group member. Forco sold its IP to an arm's length US purchaser ("Purchaseco") and another company in the Purchaseco group, and then sold all its shares of Subco to Purchaseco.

In finding that s. 69(11)(b) did not apply to deny a rollover under s. 85.1(3) for the drop-down of Subco to Forco, the Directorate stated:

The fact that there is no tax payable under the Act by Forco with respect to its gain on the disposition of the Subco shares is due to the fact that the disposition does not result in any income under the Act (Forco is simply not subject to tax under subsection 2(3) of the Act), not because an exemption from tax payable under the Act is available to Forco. Consequently, paragraph 69(11)(b) of the Act would not apply… .

The Directorate went on to state:

[A] court would probably be reluctant to apply subsection 69(11) of the Act to deny the benefit of the 85.1(3) rollover where the conditions to apply subsection 85.1(3) of the Act are met (considering paragraph 95(6)(b) of the Act) and where subsection 85.1(4) of the Act does not apply in a particular situation.

S. 85.1(4) was not considered here because there was to be a separate referral on that issue.