DATE: FEB 2 1988
TO: TORONTO DISTRICT OFFICE Audit Review Section 148-2-1
FROM: Specialty Rulings Directorate M.D. Praulins (613) 957-2103 XXXX
This is in reply to the memorandum dated November 2, 1987 from Mahmood Fazel of Business Audit in your District Office, wherein our comments have been requested regarding the application of the Income Tax Act (the "Act") in particular non-arm's length circumstances.
Our understanding of the facts is as follows:
XXXX
Your are of the opinion that the provisions of paragraph 69(1)(a) of the Income Tax Act (the "ACT") will apply to decrease XXXX adjusted cost base of the XXXX shares from the option price of XXXX per share to the fair market value of XXXX per share. You have concluded that paragraph 69(1)(a) has application because XXXX and XXXX
Based or, the information provided with your memorandum, we are prepared to offer you our general comments.
Our Comments
We are in agreement with your view that paragraph 69(1)(a) of the Act will apply to deem the price of the shares repurchased by XXXX to be acquired at the fair market value of XXXX per share. The preamble to subsection 69(1) of the Act indicates that it applies except where other sections of the Act expressly provide otherwise. The provisions of paragraph 69(1)(a) apply specifically to non-arm's length transactions. In the present case, the mind that granted the option is also the mind that exercised the option. The option price paid does not, therefore, have any bearing on fair market value for the purposes of paragraph 69(1)(a) of the Act, regardless of any written or oral agreement to the contrary.
In our view, there are no provisions in the Act which would enable a transaction of this nature to occur at an amount which is other than fair market value.
We reviewed the comments written on behalf of the taxpayer in the accountant's letter dated October 7, 1987 on page 3 wherein the accountant suggests that,"... the fair market value of the repurchase of the "put" option was XXXX The terms of the agreement and the results desired by the taxpayers, XXXX and XXXX should be disregarded by the Department in determining the fair market value of the property because the taxpayers are deemed not to be dealing at arm's length.
In summary, it is our view that the scheme of the Income Tax Act was, at the relevant time, such that when a property was disposed of pursuant to an option granted earlier, it was only that subsequent disposition that prevailed as a taxable event, since the granting of the option and its subsequent exercise by an individual were nullified by subsection 49(3) as it then read.
We trust that our comments have been of assistance to you.
A. GLEN THORNLEY
for Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch