| 24(1) | File No. 5-9623 |
| J.D. Jones | |
| (613) 957-2104 | |
| 19(1) |
May 28, 1990
Dear Sirs:
Re: Subsection 7(1.5) of the Income Tax Act (the "Act")
This is in reply to your letter of February 16, 1990, wherein you requested a technical interpretation with respect to the application of subsection 7(1.5) of the Act in the following situation.
X, a Canadian resident individual, is employed by a Canadian-controlled private corporation (CCPC). X requires shares of another CCPC, A Co., that does not deal at arm's-length with his employer in circumstances such that subsection 7(1.1) of the Act applies.
In the course of a reorganization, X exchanges the shares of A Co. for shares in B Co. to which subsection 85.1(1) of the Act applies to the exchange.
B Co. and another corporation subsequently amalgamate to form Amalco in an amalgamation to which section 87 of the Act applies. X disposes of his shares of B Co. and acquires shares in Amalco. Subsection 87(4) of the Act applies to the disposition.
Based upon the above, you have asked if we would consider that subsection 7(1.5) of the Act will apply to the exchange by X of the shares of B Co. for shares of Amalco on the amalgamation. It is your concern that although subsection 7(1.5) of the Act applies on the exchange of the shares of A Co. for the shares of B Co., the rules in paragraphs (a) to (d) thereof are only applicable for the purposes of subsection 7(1.1) and paragraph 110(1)(d.1) of the Act and not for the purposes of subsection 7(1.5) of the Act. It is your view that, from a policy perspective, subsection 7(1.5) of the Act should apply to a series of exchanges within subsections 85.1(1) or 87(4) of the Act since there is no possibility of "cashing-out" by the employee.
It is our view that, in the above situation, subsection 7(1.5) of the Act would apply on the exchange of the shares of A Co. for the shares of B Co., but that subsection 7(1.5) of the Act would not apply to the exchange by X of the shares of B Co. for the shares of Amalco as a result of the amalgamation. This is due to the wording of subsection 7(1.5) of the Act which states, in part, "For the purposes of subsection (1.1) and paragraph 110(1)(d.1), where... a taxpayer acquires shares of a Canadian corporation... in exchange for shares of a Canadian corporation... in exchange for shares of a Canadian corporation acquired under an agreement referred to in subsection (1.1)...". Accordingly, as the shares of B Co. were not acquired under an agreement referred to in subsection 7(1.1) of the Act, it is our view that subsection 7(1.5) of the Act would not apply when X disposes of his shares of B Co. and acquires shares in Amalco.
We also advise you may wish to discuss with the Department of Finance you concerns regarding the application of subsection 7(1.5) of the Act to a series of exchanges within subsections 85.1(1) or 87(4) of the Act.
We trust our comments are of assistance to you.
Yours truly,
for DirectorBusiness and General DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch