Principal Issues: Mr. A owns 100 common shares of the capital stock of a Canadian-controlled private corporation, Opco. These shares have a paid-up capital of $100,000 and an adjusted cost base of $100 for Mr. A. Mr. A incorporates a new Canadian-controlled private corporation, Gesco. Mr. A transfers the 100 common shares of the capital stock of Opco to Gesco in consideration for 100 common shares of the capital stock of Gesco, having a paid-up capital of $100,000. Mr. A and Gesco jointly elect to have the provisions of subsection 85(1) apply to the transfer. The agreed amount is $100. Whether subsection 85(2.1) applies to reduce the paid-up capital of the 100 common shares of the capital-stock of Gesco, where all the conditions set out in subsection 84.1(1) are satisfied but the amount determined by the formula as set out in paragraph 84.1(1)(a) is nil.
Position: No.
Reasons: According to the Law and previous positions.
FEDERAL TAX ROUNDTABLE 7 OCTOBER 2011
APFF CONFERENCE 2011
Question 24
Interaction between section 84.1 and subsection 85(2.1)
The Facts:
Mr. A held 100 common shares of a Canadian-controlled private corporation ("Opco") acquired from a third party. The 100 common shares had an adjusted cost base ("ACB") of $100 and paid-up capital ("PUC") of $100,000. Mr. A incorporated a new Canadian-controlled private corporation ("Holdco") to which he transferred his 100 common shares of Opco on a rollover basis under subsection 85(1). In consideration, Holdco issued 100 common shares of its capital stock with an ACB of $100 and a PUC of $100,000 to Mr. A The agreed amount for the purposes of the rollover was $100, which was his cost amount of the 100 common shares of Opco.
Question to the CRA
In the above example, would the CRA apply subsection 85(2.1) to reduce by $99,900 the paid-up capital of the shares received as consideration on the rollover, where section 84.1 applies to the transaction and there is no resulting reduction in the paid-up capital of the shares received in consideration?
CRA Response
As a first step, we have assumed for the purpose of this agreement that Holdco may lawfully, under its incorporating statute, add an amount of $100,000 to the capital account of the common shares of its capital stock issued to Mr. A in consideration for the transfer by the latter of the 100 common shares of the capital stock of Opco and that the property disposed of is capital property to Mr. A.
In general, the application of section 84.1 and subsection 85(2.1) requires consideration of all facts and circumstances relevant to a particular situation. Given that the question as stated contains very little information, we will limit ourselves to making the following general comments.
According to the preamble of subsection 85(2.1), section 84.1 takes precedence over subsection 85(2.1) respecting a disposition of property to which section 84.1 applies. Thus, where, in a particular situation, the conditions for the application of subsection 84.1(1) are met with respect to the disposition of property, we are of the view that subsection 85(2.1) does not apply, regardless of the amount calculated in accordance with the formula in paragraph 84.1(1)(a), even if nil. Consequently, in the particular situation, subsection 85(2.1) would not apply to the disposition of the 100 common shares of the capital stock of Opco to Holdco by Mr. A.
It should also be noted that the question submitted is essentially aimed at obtaining the CRA's opinion on whether there is a simultaneous application of section 84.1 and subsection 85(2.1). Consequently, our comments should in no way be interpreted to mean that we have considered the other tax consequences that may result from the particular situation, in particular with respect to the use of the paid-up capital of the 100 common shares of the capital stock of Opco by Mr. A.
Jean Lafrenière
(613) 941-2956
2011-041212