Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
APFF - 1995
Question 40
Transfers of property to a subsidiary for later sale by the subsidiary
With some commercial transactions, it may be advantageous for a corporation to transfer to a wholly owned subsidiary property that it wishes to sell to a third party. For example, a property which, when sold by the corporation would give rise to a capital gain or a gain under subsection 14(1) of the Act would be transferred under section 85 of the Act to a subsidiary so that it could make the sale. Can the Department confirm for us that the gain realized by the subsidiary would be of the same nature as the gain that would have been realized by the parent corporation? In light of the Mara Properties Ltd. decision (95 DTC 5168) there is a certain amount of uncertainty in this regard.
Answer by the Department of Revenue
This case does not change the Department’s position, which is that generally when a corporation acquires property under subsection 85(1) from a related person and resells it shortly afterward, the gain thus realized is a capital gain, and not business income if the property was capital property of the transferor. This position was presented in 1984 in question 49 of the Annual Congress of the Canadian Tax Foundation. However, this position does not apply to the disposition of eligible capital property to a related person under subsection 85(1); such a disposition would give rise to a gain described in subsection 14(1) for the transferor if it was made directly to the third party who acquired it. The tax implications of the disposition of eligible capital property to a related person in anticipation of selling it to an unrelated third party will be determined based on the facts relating to the situation.
Finally, it should be noted that if the transfer of property gives rise to inter-corporate dividends, the provisions of subsection 55(2) of the Act may apply.