5-902277
Dear Sirs:
Re: Request for Technical Interpretation Adjusted Cost Base of Shares
We are replying to your letter, dated August 27, 1990, regarding the adjusted cost base ( "ACB"), within the meaning assigned by paragraph 54(a) of the Income Tax Act (Canada) (the "Act"), of common shares in the following hypothetical situation:
1. Mr. X, a resident of Canada, owns all of the common shares of XCO which have an ACB to Mr. X of $1 and a fair market value of $1,000.
2. The paid-up capital, within the meaning assigned by paragraph 89(1)(c) of the Act, of the XCO common Hares is $1.
3. Mr. X sells his common shares of XCO to a holding company ("Holdco") of which he is the sole shareholder, and receives $1,000 cash as consideration.
You state:
"Subparagraph 84.1(1)(b) of the Income Tax Act will deem Holdco to have paid a dividend of $999 and Mr. X to have received a taxable dividend of the same amount."
Although it is your view that the ACB of XCO common shares to Holdco is $1,000, being the amount that Holdco paid for the shares, you question whether subparagraph 84.1(1)(b) of the Act has caused what would otherwise be the cost of the shares to Holdco to be re-characterized as a dividend.
Our comment
It is our view that the dividend deemed to have been paid by the "purchaser corporation", as defined in subsection 84.1(1), is a dividend for purpose of the Act only. ln other words, the cost to Holdco of the common shares of XCO (as otherwise determined under ordinary commercial principles) is not re-characterized by virtue of this deeming provision.
Since cost (as otherwise determined) is the starting point for the calculation of the ACB of shares, by virtue of subparagraph 54(a)(ii), and no adjustment is required to be made in accordance with section 53 for the deemed dividend paid by Holdco to Mr. X, we are in agreement with your view that the ACB of the XCO Holdco shares to Holdco is $1,000.
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