QUESTION I 49
Rollover Under Section 85 - Benefit Conferred on a Related Person
Paragraph 22 of Information Circular 76-19R2 states that the Department will generally not apply paragraph 85(1)(e.2) where a transferor receives retractable shares from the corporation "provided that prior to the transfer, the transferee has shareholder's equity equal to the retraction amount".
This interpretation of paragraph 85(1)(e.2) of the Act would affect many arrangements including a "classic" estate freeze where common shares of Opco are transferred to a Newco for retractable preferred shares and common shares of Newco are issued to offspring of the transferor. Is this in fact Revenue Canada's administrative practice?
DEPARTMENT'S POSITION
The above quoted comment related to a concern which arose in the context of a particular fact situation and does not accurately reflect the Department's general position in the area.
A Supplement to the Information Circular is presently being prepared which will clarify that statement.
Prepared by: A.A. Cameron