C.G. Toussaint (613) 995-1178
Attention: XXXX
July 10, 1984
This is in reply to your letter dated May 30, 1984 wherein you requested our comments on the following hypothetical situation.
Mr. A owns all the shares of a company ("OPCO") which are capital property and which have a fair market value in excess of their adjusted cost base. Mr. A transfers his shares in OPCO to a newly incorporated company ("HOLDCO"). Mr. A and HOLDCO will elect pursuant to subsection 85(1) of the Income Tax Act (the "Act") in respect of the transfer. HOLDCO will then sell the shares of OPCO to a third party.
It is your view that the sale of the shares by HOLDCO would be considered as an adventure in the nature of trade and will generate active business income which could be eligible for the small business deduction.
If OPCO were to convert its common shares held by HOLDCO into high-low preferred shares and issued for a nominal amount new common shares to a third party, it is your opinion that subsections 55(1) and 55(2) of the Act would not apply on a future redemption of OPCO's shares held by HOLDCO because on a direct sale by HOLDC0 to a third party, business income would have been realized.
Whether or not a particular transaction is of an income or capital nature is a question of fact which can only be determined upon the review of the facts in a particular case. If the sale of the OPCO's shares by HOLDCO is of an income nature, it is our view that subparagraph 54(h)(x) will not apply to reduce the proceeds of disposition of the OPCO's shares which are inventory. Therefore, the full amount of the proceeds of disposition of the OPCO's shares less their cost to HOLDCO will be included in HOLDCO's income as business income. The provisions of subsection 4(4) of the Act will apply to exclude from the income of HOLDCO the amount of the dividend deemed to have been received by HOLDCO on the redemption of the OPCO shares.
Yours truly,
for Director Corporate Rulings Division Legislation Branch