8 March 1990 Internal T.I. 74749 F - Validity of Roll-Over Election

Subject: Subsection 85(8) of the Income Tax Act (the "Act")

This is in response to your memorandum of February 20, 1990 in which you requested our views as to the validity of the subsection 85(1) election filed by the taxpayers in respect of this matter.

As noted in the attached draft memorandum, addressed to the Ottawa District Office, we believe that the better view is that the subsection 85(1) election at issue in this case is valid, although an argument to the contrary could be made.  As the election, as filed, gives effect to the tax consequences desired by the taxpayers no amended election would have to be filed.

You have also requested that we consider whether a third party, i.e. the Department, can be bound by an agreement entered into by two other parties.  We presume that the agreement to which you refer is the relevant transfer agreement entered into by the taxpayers and in particular the price adjustment clause contained therein.  We do not believe that this question is germane to the issue of whether the taxpayers in this case are required to file an amended subsection 85(1) election.  As noted above, the tax consequences desired by the parties, i.e. the proceeds of disposition of the transferred assets, the cost of such assets to the transferee and the cost of the issued shares to the transferor, will be obtained from the election as filed.  Thus, if the election is valid, the Department is bound to give effect to the election because the taxpayers have complied with the relevant provisions of the Act.  That is, it is not because of any agreement between the taxpayers that the Department is bound to give effect to the election.

We note that the Ottawa District Office has contacted us several times as to the status of this matter.

for DirectorReorganizations and Non-resident DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch