| 24(1) | 901591 |
| M. Vallée | |
| (613) 957-2093 |
19(1)
November 15, 1990
Dear Sirs:
Re: Paragraph 85(1)(e.2) of the Income Tax Act (the "Act")
This is in reply to your letter dated July 3, 1990 whereby you requested our opinion regarding the application of paragraph 65(1)(e.2) of the Act in the following hypothetical situation.
A taxpayer intends to transfer a rental property to a corporation and to avail himself of the roll-over provisions of subsection 85(1) of the Act. As consideration for this transfer, the corporation would issue to the taxpayer preferred shares redeemable and retractable for an amount equal to the fair market value of the rental property at the time of transfer.
The dividend rate on the proposed shares will be specified to be an amount equal to the current net rental income from the property after anticipated corporate taxes, net of dividend refunds. Alternatively, the dividend may be specified in such a way that it changes from year to year and is based on the after-tax rental income the property generates in any given future period. In your view, the proposed dividend would be relatively low compared to market preferred share yields.
The corporation would then issue common shares to the taxpayer's children, all of whom are over the age of 18, for a nominal amount. Alternatively, the corporation would issue the shares to the taxpayer who would then gift the shares to his children. In this way, the future growth in the rental property would attribute to the taxpayer's children.
The taxpayer intends to hold the preferred shares until death, unless the assets of the corporation were to be sold, in which case the shares would presumably be redeemed by the corporation.
You requested our comments as to whether the preferred shares issued to the taxpayer as consideration for the transfer of the rental property would have a fair market value equal to the fair market value of the rental property, so that paragraph 85(1)(e.2) of the Act would not apply on the transfer of the property to the corporation.
Our Comments
The determination of the fair market value of a particular property is a question of fact to be reviewed by the relevant district taxation office. However, we can provide you with the following general comments.
Provided that in circumstances such as those described, the redemption and retraction amount of the preferred shares issued as consideration for the transferred property is equal to the fair market value of the property immediately before the transfer, the Department will usually be satisfied that no benefit, as described in paragraph 85(1)(e.2) of the Act, has been conferred by virtue of the transfer, notwithstanding the fact that the dividend return on such shares might be low in view of the prevailing market conditions.
The foregoing response is an opinion provided in accordance with the practice described in paragraph 21 of Information Circular 70-6R2, and is no binding on the Department.
Yours truly,
for DirectorReorganizations and Non-Resident DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch