M. Carsley (613) 957-2116
November 12, 1986
Dear Sirs:
This is in reply to your letter of August 14, 1986 in which you requested our opinion as to whether subsection 110.6(8) of the Income Tax Act (the "Act") applies in the situation described in the following paragraph:
A Canadian individual transfers assets to his wholly owned Canadian company pursuant to subsection 85(1) of the Act. As part of the consideration the individual receives non-cumulative, redeemable, retractable preferred shares. The redemption amount is a fixed amount equal to the fair market value of the assets transferred to the company less the non-share consideration received. No dividends are ever paid on the preferred shares. The preferred shares are redeemed in 1986 creating a capital gain.
It is our opinion that the preferred shares would not be prescribed shares as defined in section 6205 of the Draft Regulations dated May 5, 1986. However, it may be that as the capital gain on the preferred shares would not be attributable to the fact that dividends were not paid on a share and thus the provisions of subsection 110.6(8) of the Act may not apply to deny the capital gains deduction as determined in subsection 110.6(3) of the Act. This determination could only be made after a complete examination of all the relevant facts.
We trust this will be of assistance to you.
Yours truly,
for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch