Mr. A, who held ½ of the common shares of Opco having a PUC and ACB of $100, a safe income on hand of $699,900 and a fair market value of $1,000,000, transferred his common shares to a new corporation (“Holdco”) in consideration for common shares of Holdco, with the s. 85(1) agreed amount being $300,000, thereby realizing a $299,900 capital gain for which he claimed the capital gains deduction. Opco then purchased for cancellation for a cash purchase price of $1 million, the 100 common shares held by Holdco, resulting in a deemed dividend of $999,900.
Regarding a submission based on 729658 Alberta that only $300,000 of the deemed dividend would be deemed to be a capital gain, CRA indicated that this situation was different from that considered in 729658 Alberta, and stated:
[T]he safe income on hand attributable to the 100 common shares of Opco held by Holdco (after the transfer by Mr. A) should be approximately $489,900, because a portion of the unrealized capital gain on the 100 common shares of the capital stock of Opco was realized on the transfer of the shares to Holdco.