5-912302
Dear Sirs:
Re: Subsection 110.6(8) and Regulation 6205(2)
This is in response to your letter dated August 9, 1991 in which you requested our opinion as to whether subsection 110.6(8) of the Income Tax Act(R.S.C. 1952, c.148, as amended, the "Act") would apply to deny deductions in respect of capital gains realized on the disposition of certain shares.
Our views are based on the following assumptions:
1. X co has two classes of shares, class A held by Mr. X and class B held by Mr. X's son.
2. The class A shares are not prescribed shares as defined in Regulation 6205(1) under the Act.
3. The class B shares were issued to the son prior to 1985 as part of an arrangement the main purpose of which was to permit the increase in the value of the shares of X co to accrue to the class B shares. The class B shares may be redeemed for a fixed amount.
4. No dividends have been declared on the class A or B shares since their issue.
5. A significant portion of the gain which has accrued on the class B shares is attributable to the non-payment of dividends.
You requested our opinion as to whether subsection 110.6(8) of the Act would apply to deny the capital gains exemption in respect of a capital gain realized on the sale of the class A or B shares.
The class B shares have a redemption feature so Regulation 6205(1)(a)(i)(D) precludes them from being prescribed shares within the meaning of Regulation 6205(1). The class A shares cannot qualify as prescribed shares under Regulation 6205(2) even though they were issued in an estate freeze because the class B shares issued in the freeze are not prescribed shares so the requirement in Regulation 6205(2)(a)(i) is not met. Thus a significant portion of the gain which would arise on the disposition of the class B shares would be attributable to the non-payment of dividends on shares other than prescribed shares and section 110.6(8) would apply to deny the availability of the capital gains exemption.
The facts provided are insufficient to determine whether or not the same result would apply with respect to a gain on the disposition of the class A shares. If the class A shares had their value fixed on the day of the freeze, then the subsequent nonpayment of dividend might not have contributed to any gain which might be realized on their disposition.
The foregoing comments are given in accordance with the practice referred to in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990 and are not binding on Revenue Canada, Taxation.
Yours truly,
for DirectorReorganizations and Non-resident DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch