Dear Sirs:
Re: Section 85.1 of the Income Tax Act (Canada) (the "Act"
We are writing in response to your letter of December 18, 1990 wherein you requested our comments on the following hypothetical situation.
1. Taxpayer A enters into an agreement with Xco, a Canadian corporation, whereby A agrees to exchange shares of another corporation for preferred shares of Xco.
2. The above exchange meets all the conditions described in subsection 85.1(1) of the Act.
3. A and Xco enter into a separate agreement whereby, at the time of the above exchange, A receives the right to put the Xco preferred shares to Yco, a corporation related to Xco, in exchange for a fixed number of Yco common shares (the "Right"). The Right is exercisable during a stated period of time.
It is your view that, as the Right constitutes "consideration other than shares of a particular class of the capital stock of the purchaser" as found in paragraph 85.1(2)(d) of the Act, subsection 85.1(1) of the Act does not apply in respect of the above exchange by virtue of that paragraph.
Comments
We agree with your conclusion that the Right will be "consideration other than shares of a particular class of the capital stock of the purchaser" as found in paragraph 85.1(2)(d) of the Act. A precise determination will depend on the facts of the particular case.
The comments expressed are not advance income tax rulings and are not considered binding on the Department, in respect of any taxpayer, in accordance with paragraph 21 of Information Circular 70-6R2 dated September 28, 1990.
Yours truly,
for DirectorReorganizations and Non-Resident DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch