| 19(1) | File No. 5-7940 |
| D.Y. Dalphy | |
| (613) 957-2117 |
November 10, 1989
Dear Sirs:
Re: Subsection 5905(8) of the Income Tax Regulations (the "Regulations")
This is in reply to your letter of April 20, 1989 concerning subsection 5905(8) of the Regulations.
You presented the following situations to us for our consideration:
Corporation A, resident in Canada, owns all the shares of Corporation X, a foreign affiliate. The adjusted cost base of the shares of Corporation X to Corporation A is $10,000. Corporation X has exempt surplus vis-a-vis Corporation A of $5,000. Corporation A disposes of the shares of Corporation X to Corporation Y (a non-resident corporation) for 10% of the shares of Corporation Y. Corporation Y thereby becomes a foreign affiliate of Corporation A. Subsection 85.1(3) of the Income Tax Act (the "Act") applies to the transaction.
Case A - Corporation A makes a subsection 93(1) election in the amount of $5,000
Case B - Corporation A makes a subsection 93(1) election in the amount of $1.
Subsection 5905(8) of the Regulations applies where certain shares are "disposed of to ... another foreign affiliate of the (transferee) corporation" and subsection 93(4) of the Act applies where a taxpayer "acquired shares of a foreign affiliate". In our view, the wording used in respect of timing is broad: the subsections apply where the corporation is a foreign affiliate immediately after/as a result of the disposition or acquisition. The subsections are not restricted in application to those entities which were foreign affiliates "immediately before" the disposition or acquisition. Accordingly, in cases A and B, Corporation A will have a basis bump in its shares of Corporation Y equal to the amount of the subsection 93(1) election, the capital loss (equal to the subsection 93(1) election) on the disposition of the shares of Corporation X would be denied and the exempt surplus available to A in X would, pursuant to subsection 5905(8) of the Regulations, be reduced in Case A to 0 and in Case B to 10% of $49,990.
A similar timing question exists in respect of paragraph 95(6)(b) of the Act. In our view, similar broad wording is used. It is not necessary that the entity was a foreign affiliate "immediately before" the share issue; rather it is sufficient that the share issue was, in retrospect, by a foreign affiliate.
We hope our comments will assist you. These comments represent our opinion of the law as it applies generally. As indicated in paragraph 24 of Information Circular 70-6R dated December 18, 1978 this opinion is not a ruling and accordingly, it is not binding on Revenue Canada, Taxation.
Yours truly,
for DirectorReorganizations and Non-Resident DivisionSpecialty Rulings DirectorateLegislative and IntergovernmentalAffairs Branch