| June 19, 1990 | |
| Current Amendments and Regulations | Specialty Rulings |
| Division | Directorate |
| J. Teixeira | |
| Mr. B.J. Bryson | 957-2110 |
| File No. 7-4757 |
SUBJECT: Subsection 15(1) of the Act Transfer of property to a wholly-owned Canadian subsidiary
We are writing in response to your letter of February 22, 1990 in which you requested our interpretation of the application of subsection 15(1) of the Income Tax Act (the "Act") to the following situation.
(1) A Corporation transfers property to its wholly-owned Canadian subsidiary.
(2) The Corporation and its wholly-owned subsidiary jointly elect under subsection 85(1) of the Act.
(3) The consideration for the transfer is to be a common share of the wholly-owned subsidiary and non-share consideration equal to the adjusted cost base of the property transferred.
(4) The value of the share is issued to the parent on the exchange exceeds the difference between the fair market value of the transferred property and the boot received on the exchange.
(5) There is only one class of shares issued by the wholly-owned subsidiary, there are no V-day value considerations and the transaction is not tax motivated.
As stated in IT-432R and IT-291R it is the Department's position that where a shareholder transfers property to a corporation, the consideration and the fair market value of the share issued. If the fair market value of the total consideration received exceeds the fair market value of the property transferred, the excess is included in the income of the shareholder pursuant to subsection 15(1) of the Act. In addition subsection 84(1) of the Act may operate to deem a dividend to have been paid where a corporation increases the paid-up capital in respect of a class of shares without a corresponding increase in the net asset value of the corporation. the deemed dividend would reduce the amount to be included in income pursuant to subsection 15(1) of the Act.
You may wish to consult with Audit Applications in order to ascertain whether they would follow these IT's in a wholly-owned situation.
M.A. Hiltzfor Director GeneralRulings DirectorateLegislative and IntergovernmentalAffairs Branch