| File: | 7-921146 |
| Author: | D.J. Powrie |
April 28, 1992
AUTHOR DPOWRI
PRAIRIE PROVINCES TAX CONFERENCE
DRAFT/EBAUCHE
May 19 & 20, 1992
Question 1
Subsection 85(5.1) is a "stop loss" rule which applies, among other situations, where the transferee was a member of a group of persons that immediately after the disposition controlled the transferor directly or indirectly in any manner whatever (paragraph 85(5.1)(b)). If A and B are unrelated individuals who own 95% and 5%, respectively, of the shares of Opco, could the rule apply to a transfer of depreciable property from Opco to B? What if A and B each own 50% of the shares in Opco? Should the section refer to transfers to members of a "related group" instead of to transfers to members of a "group"?
Department's Position
In the first situation (where B owns 5% of the shares of Opco), B is not, for the purposes of subsection 85(5.1), a member of a group which directly or indirectly controls Opco since A acting on his own controls Opco. In Southside Car Market Ltd. et. al. v. M.N.R. (82 DTC 6179 (FCTD)) the court held that where one person controls a corporation, it cannot also be said to be controlled by a group. Assuming that neither B nor his spouse has any direct or indirect influence that would, if exercised, result in control in fact of Opco, subsection 85(5.1) would not apply to a transfer of depreciable property from Opco to B.
In the second situation (where A and B each own 50% of the shares of Opco), it is a question of fact as to whether A and B are a group which directly or indirectly controls Opco and the question could only be answered after a review of all the relevant circumstances. For A and B to constitute a group that controls Opco, there must exist a common link or interest between them (which must involve more than their status as shareholders). If they are, in fact, such a group, then subsection 85(5.1) could apply to a transfer of depreciable property from Opco to B.
The final question relates to tax policy and should be addressed to the Department of Finance.