21 February 1990 Ministerial Correspondence 59454 F - Capital Gains Deduction - Paid-up Capital of Shares

Dear Sirs:

Re:  Capital Gains Deduction Under Section 110.6 of the Income Tax Act (Canada) (the "Act")

We are writing in response to your letter of January 19, 1990 in which you requested our opinion on the availability of the capital gains deduction in respect of capital gains resulting from the redemption of certain shares.

These shares were issued pursuant to a transfer of assets under section 85 of the Act.  The shares have the following features:  preferred, redemption of these shares will result in a capital gain since the shares have a low adjusted cost base, a high paid-up capital and a high redemption value.  Since the shares were issued prior to November 21, 1985, the provisions of subsection 85(2.1) of the Act will not apply to reduce the paid-up capital of the shares.

You have stated that you do not feel that the capital gains deduction may be denied by subsection 110.6(8) of the Act even though no dividend have been paid on the shares.  It is your belief that the capital gain results from the value of the assets transferred to the company in exchange for the shares rather than the failure to pay dividends.

To the extent that the above facts represent actual proposed transactions, your enquiry should be the subject of a request for an advance income tax ruling.

The provisions of subsection 110.6(8) of the Act will apply if "it may reasonably be concluded, ... that a significant part of the capital gain is attributable to the fact that dividends were not paid on a share".  The reference to "a share" is not necessarily the preferred shares in your example.  It may also encompass the gain on preferred shares where it is reasonable to conclude that the gain is attributable to the fact that dividends were not paid on other classes of shares.  Although it is a question of fact whether it would be reasonable to reach such a conclusion in a particular situation, we would not expect the provisions of subsection 110.6(8) of the Act to apply where the fair market value of the preferred shares equals the fair market value of the asset transferred.

The comments expressed are not advance income tax rulings and are not considered binding on the Department, in respect of any taxpayer, in accordance with paragraph 24 of Information Circular 70-6R dated December 18, 1978.

Yours truly,

for DirectorReorganizations and Non-Resident DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs branch