| 24(1) | 5-913403 |
| D.J. Powrie | |
| (613) 957-2109 |
Attention:19(1)
May 28, 1992
Dear Sirs:
Re: Subsection 69(11) and the disposition of identical properties
This is in reply to your letter of December 4, 1991 in which you requested our opinion of the application of subsection 69(11) to a situation where a company disposes of some (but not all) of a group of identical properties held by it where some of the identical properties were acquired within the last three years in circumstances to which subsection 69(11)[FN1.: All references to subsections are references to provisions of the Income Tax Act.] might apply.
Our discussion is based on the following hypothetical situation:
1. Lossco acquires 75 shares (the "Low Cost Shares")in Pubco on a rollover basis on day one. The fair market value of each share is $5. The adjusted cost base (as defined in paragraph 54(a)) of each share is $1. Lossco is a specified person (as defined in subsection 69(12)) in relation to the vendor of the shares.
2. Lossco acquires 25 shares in Pubco for fair market value consideration of $125 on day two. Because of the application of subsection 47(1), Lossco's adjusted cost base of each of its 100 shares in Pubco is now $2 (($75 + $125)/100).
3. Lossco has deductions available in computing its income. One of the main purposes of acquiring the Pubco shares on day one was to obtain the benefit of those deductions on a subsequent disposition of the Pubco shares.
4. Within three years of day one, Lossco sells 50 of its Pubco shares to an unrelated party for $250, realizing a capital gain of $150 which it shelters with its available deductions. It is not possible to determine, as a question of fact, how many of the 50 shares sold were Low Cost Shares.
The issue is to what extent will subsection 69(11) apply to deem the vendor to have disposed of Low Cost Shares for proceeds equal to their fair market value at that time. You have suggested that the shares should be considered to have been sold on a first-in first-out basis ("FIFO"). In the preceding example this would mean that all 50 of the shares sold by Lossco would be considered to have been Low Cost Shares so subsection 69(11) would apply to the disposition of 50 of the Low Cost Shares on day one. You suggest that this approach should apply because that is the approach that applies in respect of identical capital properties acquired before and after valuation day (we note that this approach is required for such properties by paragraph 26(8)(d) of the Income Tax Application Rules, 1971).
Our Comments
In our view, three-quarters of the shares sold would, for the purposes of subsection 69(11), be considered to be Low Cost Shares and one-quarter would be considered to be High Cost Shares. Subsection 69(11) would deem 37.5 shares to have been disposed of by the vendor on day one for fair market value proceeds. In other words, we would consider that a proportion of the shares sold were Low Cost Shares equal to the proportion of the total shares held which were Low Cost Shares.
In our view, this interpretation reaches an appropriate result in light of the tax policy objectives of subsection 69(11) and is a reasonable interpretation of the relevant provisions. To assume that the shares were sold on a FIFO (or on a last-in first-out basis) reaches widely different results depending solely on the order of acquisition. In the preceding example, Lossco has sheltered a gain of $150 but the vendor would, if the issue were resolved on the basis that the first shares in were the first shares out, be deemed to have realized a gain of $200. Conversely, if the Low Cost Shares were acquired second, rather than first, the vendor's deemed realization would be only $100.
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 Foreign DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch