5-910133
Dear Sirs:
Re: Request for Technical Interpretation Section 84.1 of the Income Tax Act (the "Act")
We are writing in response to your letter, dated January 4, 1991, in which you requested our views on the application of section 84.1 to the determination of the adjusted cost base in the following hypothetical situation:
An individual (the "Individual") sold shares of Investco to Acquireco in a transaction to which paragraph 84.1(1)(b) applied to deem a dividend to have been paid to the Individual. The amount paid to the Individual for the shares was $10,000 and the amount of the deemed dividend was $9,999
Acquireco is contemplating a sale of the shares of Investco to an arm's-length party.
It is your opinion that the adjusted cost base to Acquireco of the Investco shares is the amount paid for those shares by Acquireco ($10,000) in spite of the fact that paragraph 84.1(1)(b) deemed a dividend to have been paid to the Individual in 1986 by Acquireco equal to a portion of the purchase price.
Our comments
We agree with your position, as stated above. Although paragraph 84.1(1)(b) has deemed a dividend to have been paid to the Individual by Acquireco at the time of the disposition of the Investco shares by the Individual, this has not altered the fact that the amount laid out for the shares of Investco by Acquireco was the full purchase price of $10,000.
Therefore, it is our view that the adjusted cost base of the shares to Acquireco, assuming no adjustments under section 53 of the Act are required, is $10,000.
The foregoing comments are given in accordance with the practice referred to in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990 and are not binding on Revenue Canada, Taxation.
Yours truly,
for DirectorReorganizations and Non-resident DivisionRulings Directorate Legislative and Intergovernmental Affairs Branch