10 May 1990 Income Tax Severed Letter ACC9074 - Responses to Technical Questions for Local Study Group

Vancouver District Office                    Specialty Rulings
Audit Review                                   Directorate
Section 148-13                               J.E. Harms
J.C. Fitz-Clarke                             (613)957-2109

Attention: E. Schneider                      900410

Subject:  Responses to technical questions for local study group 
          Your file WDM 1427-3

In response to your memorandum of April 11, 1990, we enclose draft responses to questions 18(a) and (b) regarding the meaning of "contribution of capital".

for Director Reorganizations and Non-resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch

Enclosure: Draft responses

Vancouver District Office

Draft responses to questions by local study group

Question:

What is the meaning of "contribution of capital" in paragraph 53(1)(c) of the Income Tax Act (the "Act") and how does it differ from the meaning of "contributed surplus" in paragraphs 84(1)(c.2) and (c.3) of the Act?

Response:

The term "contribution of capital" is not defined in the Act and the Department has not formulated a position with respect to the meaning of the term except in response to particular fact situations. Although an exhaustive definition has not been developed administratively, it is clear that the term is not synonymous with "contributed surplus". To illustrate, for example, a loan or transfer of property to a corporation may qualify as a contribution of capital (albeit one that is excluded from the application of paragraph 53(1)(c) of the Act) but will not necessarily result in any increase in the contributed surplus of the corporation.

Although the term "contribution of capital" may have a broad meaning, certain conditions must be satisfied in order for a contribution of capital to result in an increase in the adjusted cost base of the contributor's shares of the corporation. The contribution must not be one of the excluded types of contributions described in paragraph 53(1)(c) and must result in an increase in the fair market value of the contributor's shares of the corporation.

Question:

Where par value shares are issued for a price in excess of their par value, is the shareholder's cost of the shares determined simply with reference to the purchase price and costs of acquisition or is the excess included as part of the adjusted cost base of the shares only by virtue of paragraph 53(1)(c) of the Act?

Response:

Subject to the application of specific deeming provisions in the Act (such as subsection 69(1) or 85(1)), the shareholder's cost of such shares would be determined simply with reference to the purchase price and other costs of acquisition of the shares. Thus the excess of the purchase price over the par value of the shares would ordinarily be reflected in the adjusted cost base of the shares without reference to paragraph 53(1)(c) of the Act.