| August 24, 1990 | |
| Special Audits Division | Rulings Directorate |
| J.G. Pearson | J. Teixeira |
| 957-2119 | |
| 7-4783 |
Re: 1989 ROUND TABLE QUESTION NO. 43
We are writing in response to your memorandum dated March 2, 1990, in which you requested our comments regarding the scope of the answer to question No. 43 in the 1989 Canadian Tax Foundation Round Table and an actual reassessing situation.
Question No. 43 concerned the application of the general anti-avoidance rule ("GAAR") to certain transactions where an individual transfers shares of a family farm corporation to his children, using the provisions of subsection 73(4) of the Act and immediately thereafter the children dispose of the shares to a non-related third party and claim the capital gains deduction under subsection 110.6(2) of the Act.
The answer to the question was that GAAR would not ordinarily apply to these transactions in and by themselves. The rationale of this reply is that the transactions meet the conditions set out in subsection 73(4) of the Act, and there is no requirement for the children to be actively engaged in farming or to hold the shares of the corporation for any particular length of time. To this extent the answer to the question is consistent with the finding in Orr that the disposition in that case did not violate the object and spirit of subsection 73(5) of the Act.
Question 43 does not include situations where, before the transfer to the children, the individual has agreed to sell the shares to an unrelated person and prior to such sale transfers his rights under such agreement to his children. As you point out, such a scheme might constitute an agency. Also, it may be subject to the doctrine in Furniss v. Dawson which was accepted by Estey J. in Stubart Investments.
In addition, the question does not deal with the nature of the shares disposed of to the third party. If the sale is determined on the facts to be a sale by the children, the gain realized by the children may be on income account depending on the length of time that the shares are held by the children and other factors that are relevant in "trading" cases.
If there is a relationship of agency or if the situation is governed by Furniss v. Dawson, the transactions would not comply with subsection 73(4) since the gain would be the gain of the individual. If the transactions did constitute a transfer by the individual to his children but their gain was on income account, the deduction under subsection 110.6(2) would not be available.
Question 43 does not raise, and the answer to the question does not address, these issues and no one should infer that they do. The transactions in question 43 were assumed to comply with the relevant provisions of the Act and not to be subject to any other anti-avoidance rule. Such an assumption is necessary to ensure that answers to questions submitted by taxpayers are comprehensible. This is the assumption upon which the examples in IC 88-2 are based (see paragraph 6). If it is necessary in replying to a query to refer to all provisions or rules that may affect a situation, the questions and answers would be lengthy, complicated and largely meaningless.
In the situation mentioned in paragraph 2 of your memo the father sold the preferred shares to his minor children in consideration for a promissory note. He utilized the provisions of subsection 73(5) of the Act to defer the gain realized on the disposition of the preferred shares to his children. The children included in their income the deemed dividends but, after claiming personal exemptions and applying the dividend tax credit, they had no tax payable. The children used the funds received on the redemption of the shares to pay the amounts owing to the father on the promissory notes. The father loaned the money to the corporation. It is important to note that the father at all times had control of the monies.
This type of situation should be considered from the point of view of an assessment on the grounds of agency or Furniss v. Dawson. The Tax Court in Orr did not provide any rationale for its finding that subsection 55(1) and 56(2) did not apply. It should not, therefore, be taken as authority for the proposition that neither of these doctrines apply. Also, as pointed out above, our reply to Question 43 of the 1989 Roundtable is not authority that these avoidance doctrines may not apply to this situation.
If you have any questions regarding our comments, please call J. Teixeira at 957-2110.
R.J.L. ReadDirector GeneralRulings DirectorateLegislative and Intergovernmental Affairs Branch