Principal Issues: Whether subsection 85.1(3) would apply to the particular situation outlined in the request for interpretation?
Position: Yes, provided that all the conditions described in the reply letter are met.
Reasons: Interpretation of subsection 85.1(3).
XXXXXXXXXX 2007-024372 S. Leung, CA Attention: XXXXXXXXXX
March 6, 2008
Dear Sir or Madam:
Re: Subsection 85.1(3) of the Income Tax Act (the "Act")
We are writing in reply to your facsimile of July 4, 2007 in which you requested our confirmation of your interpretation of the above-noted subsection of the Act with respect to the following situation described in your facsimile.
The Situation
1. Canco A and Canco B are both corporations resident in Canada and are not Canadian controlled private corporations within the meaning assigned by subsection 89(1) of the Act.
2. Canco A and Canco B are related entities.
3. Canco A owns all the shares of Foreignco 1, a corporation resident in
Country X.
4. Canco B owns 30% of the shares of Foreignco 2, a corporation resident in Country Y.
5. Canco B transfers all the shares of Foreignco 2 that it owns to Foreignco 1 for the sole consideration of the shares of Foreignco 1.
It is your view that subsection 85.1(3) of the Act would apply to the transfer described in 5 above such that the proceeds of disposition to Canco B of the shares of Foreignco 2, the cost to Foreignco 1 of the shares of Foreignco 2, and the cost to Canco B of the shares of Foreignco 1 will each equal to the adjusted cost base to Canco B of the shares of Foreignco 2 immediately before the transfer.
Our Comments
It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular 70-6R5, "Advance Income Tax Ruling", dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the internet at http://www.cra-arc.gc.ca. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office ("TSO") for their views. A list of TSOs is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following general comments.
The pre-amble of subsection 85.1(3) of the Act states:
"Where a taxpayer has disposed of capital property that was shares of the capital stock of a foreign affiliate of the taxpayer to any corporation that was, immediately following the disposition, a foreign affiliate of the taxpayer (in this subsection referred to as the "acquiring affiliate") for consideration including shares of the acquiring affiliate..."
There are three conditions that must be satisfied before subsection 85.1(3) will apply. First the shares of the foreign affiliate disposed of by the taxpayer must be capital property to the taxpayer. Second, immediately after the disposition, the acquiring affiliate must be a foreign affiliate of the taxpayer. Third, the consideration received by the taxpayer must include shares of the acquiring affiliate.
Therefore, provided that the above three conditions are met with respect to the transfer of the Foreignco 2 shares by Canco B to Foreignco 1 in the situation described above and provided that subsection 85.1(4) does not apply, we confirm that your above-noted interpretation of subsection 85.1(3) is correct.
As stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, the opinion expressed in this letter is not a ruling and is consequently not binding on the CRA.
Yours truly,
Olli Laurikainen, CA
Section Manager
for Division Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch