Principal Issues: [TaxInterpretations translation] Can expenses incurred by shareholders of a corporation in respect of property owned by the corporation increase the adjusted cost base of their shares?
Position: Yes to the extent that the contribution of capital results in an increase in the fair market value of the shares of the corporation's capital stock.
Reasons: By virtue of paragraph 53(1)(c) of the Income Tax Act, the ACB of a corporation's shares may increase when shareholders make a contribution of capital to the corporation.
December 1, 2009
Montreal Tax Services Office Headquarters Business and Partnerships Division Attention: Mireille Morin François Bordeleau, Advocate
2009-032495
Addition to the adjusted cost base of shares of a corporation
This is further to your email of June 2, 2009 in which you requested our opinion regarding the potential increase in the adjusted cost base ("ACB") of shares of a corporation. We apologize for the delay in responding to your question.
Specifically, you referred to a situation where individuals (the "Shareholders") own shares of a corporation (the "Corporation") that owns an apartment building (the "Building"). The Shareholders incur expenses of a capital nature with respect to the Building and wish to know whether these expenses may increase the ACB of the shares they hold in the Corporation.
Unless otherwise indicated, all statutory references herein are to the provisions of the Income Tax Act (the "Act").
Our Comments
As discussed in Interpretation Bulletin IT-456R, Capital Property - Some Adjustments to Cost Base, paragraph 53(1)(c) provides for an addition to a taxpayer's ACB of a share of a corporation where the taxpayer has made a contribution of capital to the corporation after 1971.
Although the expression "contribution of capital" is not defined in the Act, the Canada Revenue Agency is of the view that a transaction that otherwise increases the capital of a corporation without any consideration being given by the corporation in respect of that increase may result in a contribution of capital for the purposes of paragraph 53(1)(c). For example, a contribution of capital occurs where a shareholder has fully paid for shares with no par value and subsequently agrees to make an additional contribution to the corporation (e.g., to remove a deficit or to provide funds for expansion, without the issuance of any additional shares). However, paragraph 53(1)(c) will apply only where a contribution of capital to a corporation by a taxpayer holding shares of the capital stock of the corporation results in an increase in the fair market value of the shares of the capital stock held by the taxpayer.
Since the computation under paragraph 53(1)(c) must be made on a share-for-share basis, the increase in the ACB of each share as a result of a contribution of capital will be represented by the ratio of the amount of the increase in the fair market value of that share to the amount that can reasonably be considered to represent the increase in the fair market value of all shares of the capital stock owned by the taxpayer immediately after the contribution.
Where a taxpayer holds more than one class of shares of a corporation, the amount added to the ACB of the shares will be allocated among them according to the respective increase in the fair market value of the shares held by the taxpayer in each class resulting from the contribution.
In this case, we are of the view that the capital expenditures incurred by the Shareholders with respect to the Building constitute a contribution of capital to the Corporation. Accordingly, to the extent that such contribution would result in an increase in the fair market value of the shares held by the Shareholders in the Corporation, we would be of the view that paragraph 53(1)(c) would apply to provide for an increase in the ACB of such shares.
Access to Information
For your information, unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, the electronic library version can be provided. Alternatively, the client may request a severed copy using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Ms. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.
We hope that these comments are of assistance.
François Bordeleau, Advocate
Manager
Business and Partnerships Section
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.