Principal Issues: [TaxInterpretations translation] Would an individual be able to deduct a capital gains deduction in computing taxable income if the individual sold all of the shares held by the individual in the capital stock of a particular corporation to a corporation in which all of the shares of the capital stock are held by the individual's adult son?
Position: No.
Reasons: Application of 84.1.
XXXXXXXXXX
2010-037868 I. Landry, M. Fisc
October 1, 2010
Dear Sir,
Subject: Capital gains deduction
This is in response to your letter of August 19, 2010 in which you asked us whether you could deduct an amount as the capital gains deduction in computing your taxable income if you disposed of all of the shares that you hold in the capital stock of a particular corporation ("Opco") to another corporation ("Sonco"), in which all the shares of the capital stock are held by your adult son, in consideration for an interest-bearing note payable over 10 years.
We understand from the facts submitted to us that you are a resident of Canada, that you own all of the shares of the capital stock of Opco that is also a resident of Canada, and that the sale price of your shares would be equal to their fair market value. We also understand that the shares of the capital stock of Opco would, at the time of their disposition, be "qualified small business corporation shares" and "capital property" as those terms are defined in subsection 110.6(1) and section 54 of the Income Tax Act (the "Act").
Unless otherwise indicated, all statutory references herein are to the provisions of the Act.
Our Comments
As stated in paragraph 22 of Information Circular 70-6R5, Advance Income Tax Rulings, it is the practice of the Canada Revenue Agency (the "CRA") not to issue a written opinion regarding proposed transactions otherwise than by way of advance rulings. Furthermore, when it comes to determining whether a completed transaction has received appropriate tax treatment, that determination is made first by our Tax Services Offices as a result of their review of all facts and documents, which is usually performed as part of an audit engagement. However, we can offer the following general comments that we hope may be helpful to you.
In general, paragraph 84.1(1) provides particular consequences where an individual resident in Canada disposes of shares that are capital property of any class of the capital stock of a corporation resident in Canada (the "subject corporation") to another corporation (the "purchaser corporation") with which the individual does not deal at arm's length and, immediately after the disposition, the subject corporation would be connected (within the meaning assigned by subsection 186(4) if the references therein to "payer corporation" and to "particular corporation" were read as "subject corporation" and "purchaser corporation" respectively) with the purchaser corporation.
In the situation presented, we are of the view that all the conditions for the application of subsection 84.1(1) would be satisfied. Thus, a dividend would be deemed to have been paid by Sonco and received by you as a result of this sale of shares. Furthermore, that deemed dividend would not be taken into account when calculating the "proceeds of disposition" of your Opco shares under paragraph (k) of the definition of that expression contained in section 54. The application of section 84.1 to the sale of your Opco shares in this situation would therefore result in a dividend rather than a capital gain being included in computing your income, thus preventing you from deducting a capital gains deduction in computing your taxable income.
We hope that our comments will be of assistance.
Best regards,
Randy Hewlett
Manager
for the Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.