Principal Issues: Whether subsection 80.6(1) will apply to the scenario presented.
Position: Question of fact.
Reasons: Wording of the provision.
XXXXXXXXXX 2017-072781
M. Séguin
February 20, 2018
Dear Sir,
Subject: Section 80.6
This is in response to your letter of October 18, 2017, in which you requested our views on section 80.6 in the context of a hypothetical situation to which you referred.
Unless otherwise indicated, any statutory references herein are to provisions of the Income Tax Act (the “Act").
This technical interpretation provides general comments about the provisions of the Act. It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R7, Advance Income Tax Rulings and Technical Interpretations.
Hypothetical Situation in Technical Interpretation 1999-0006705
The technical interpretation in question presented the CRA's position with respect to a situation involving an agreement for the sale of shares at a subsequent date.
You presented the facts as follows by modifying the dates originally presented in Technical Interpretation 1999-0006705:
1. Mr. A incorporated an entity on January 1, 2016, subscribed to shares of the capital stock of the corporation and commenced to operate a new business in this corporation.
2. On November 1, 2016, Mr. A and Mr. B reached an agreement whereby Mr. A agreed to sell to Mr. B (an employee of the corporation unrelated to Mr. A) one-third of the shares of the corporation for the fair market value of those shares on November 1, 2016.
3. The shares of the capital stock of the corporation were small business corporation shares that qualified for the capital gains exemption in every respect except that Mr. A had not held the shares for a minimum of 24 months.
4. In accordance with the agreement, Mr. A did not sell the shares to Mr. B at that time. The agreement was structured so that Mr. A sold the shares of the capital stock of the corporation to Mr. B in January 2018 for their fair market value on November 1, 2016. Mr. A retained legal and beneficial ownership of those shares until January 1, 2018. Upon their transfer in January 2018, they still qualified as qualified small business corporation shares for the purposes of the capital gains exemption.
5. Mr. A and Mr. B were Canadian residents.
In Technical Interpretation 1999-0006705, the CRA indicated that the fact that Mr. A and Mr. B had entered into a buy-sell agreement to sell the shares of the of the corporation at a later date for a predetermined price did not, in and by itself, mean that there had been a change in beneficial ownership of the shares at the time of making the contract. In determining who actually owned a share at a given point in time, the CRA indicated that it would take other factors into account, for example, the right to vote and the right to receive dividends. Since it appeared, according to the facts submitted, that Mr. A had retained the legal and beneficial ownership of the shares until the subsequent date, the CRA indicated in Technical Interpretation 1999-0006705 that it was of the view that the criteria relating to the holding of the shares over a 24-month period stipulated in the definition of a "qualifying small business corporation share" were satisfied.
You noted in your request that Technical Interpretation 1999-0006705 was published in November 2000 and thus well before the introduction of section 80.6 and the definition of "synthetic disposition arrangement" in subsection 248(1).
Your questions
a) You asked if the CRA can confirm that the transaction in the above hypothetical situation would come within subsection 80.6(1).
b) You asked whether subsection 80.6(1) would still apply in the event that the agreement provided for a (per share) selling price equivalent to the fair market value on November 1, 2016, plus 20% of the (per share) profits made during the period from November 1, 2016 to January 1, 2018 (but without realized losses reducing the selling price).
c) Would the answer to question (b) be the same if the selling price were also adjusted for the (per share) losses realized during the same period?
Our Comments
Subsection 80.6(1) provides that if a "synthetic disposition arrangement" is entered into in respect of a property owned by a taxpayer and the synthetic disposition period of the arrangement is one year or more, the taxpayer is deemed to have both disposed of the property immediately before the beginning of the period for proceeds equal to its fair market value at the beginning of the period and to have reacquired the property at the beginning of the synthetic disposition period at a cost equal to that fair market value.
Subsection 248 (1) generally provides that a "synthetic disposition arrangement" in respect of property owned by a taxpayer is an agreement that has the effect of eliminating all or substantially all the taxpayer’s risk of loss and opportunity for gain or profit in respect of the property for a definite or indefinite period of time.
As stated in the Technical Notes of the Department of Finance in respect of the definition of synthetic disposition arrangement in subsection 248(1), whether or not all or substantially all of a taxpayer’s risk of loss and opportunity for gain or profit in respect of a property has been eliminated is a question of fact. Therefore, an exhaustive analysis of all facts in a given file should be conducted to determine whether it is a "synthetic disposition arrangement". As stated in the Department of Finance’s Technical Notes, the potential for a taxpayer to realize gains or profits in respect of a property would include the taxpayer's rights to earn income, such as dividends, or to obtain other benefits in respect of the property and having economic exposure to any increase in the value of the property. Likewise, a taxpayer's risk of loss would include any liabilities or obligations to provide benefits in respect of property and having economic exposure to any decreases in the value of the property.
Consequently, without an analysis of all the facts and circumstances surrounding the particular situation, it is not possible to answer your questions in a definitive manner. For examples of arrangements that may fall within subsection 80.6(1), you may refer to the Department of Finance’ Technical Notes in respect of the definition of synthetic disposition arrangement in subsection 248(1).
That said, with respect to your first question, we are of the view, solely on the basis of the limited facts submitted in your request, that the agreement could be characterized as a "synthetic disposition arrangement" and that paragraph 80.6(1) could apply. In particular, it seems that the agreement would not have the effect of eliminating all or substantially all of Mr. A’s potential for sustaining losses or realizing gains or profits in respect of the shares of the corporation he holds.
As for your second question, although the agreement reached in these circumstances appears to have the effect of eliminating the possibility of sustaining losses, it appears that it would not have the effect of eliminating all or substantially all of the opportunity to realize gains or profits in respect of the shares of the corporation held by Mr. A. If this were the case, it is possible that the agreement does not qualify as a "synthetic disposition arrangement" within the meaning of paragraph 248(1), and subsection 80.6(1) would not apply.
The answer to your third question would be the same if the sales price were also adjusted for the losses realized during the period, namely, that it is possible that the agreement would not qualify as a "synthetic disposition arrangement," and that subsection 80.6 (1) would not apply.
Best regards,
Urszula Chalupa, LL.B, M. Fisc.
for the Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy
and Regulatory Affairs Branch