24(1)
APRIL 4, 1990
NOTES FOR USE BY BRYAN DATH RE. QUESTIONS SUBMITTED FOR DISCUSSION
OTHER PARTICIPANTS, PAUL LAILEY DEPT OF FINANCE
19(1)
FACT SITUATION 1
(A) IN MARCH, 1988, A STARTED UP A BUSINESS IN A BUILDING WHICH HE BOUGHT FOR THAT PURPOSE.
(B) AS IT APPEARED THAT THE BUSINESS WOULD BE SUCCESSFUL AT THE OUTSET, HE DECIDED THAT HIS TWO YOUNGER BROTHER, B AND C, WOULD HELP HIM TO RUN THE BUSINESS.
(C) IN AUGUST, 1988 A, B, AND C TRANSFERRED THE BUSINESS, OTHER THAN THE BUILDING WHICH WAS STILL OWNED BY A, INTO X CO, A NEW CORPORATION. A OWNED 60% OF THE SHARES AND EACH OF B AND C OWNED 20%.
(D) THE THREE BROTHERS ENTERED INTO A BUY-SELL AGREEMENT UNDER WHICH THE SURVIVORS HAD THE OPTION TO BUY THE DECEASED'S SHARES AND THE DECEASED'S WIDOW HAD THE OPTION TO "PUT" HIS SHARES TO THE SURVIVORS. THEY ARRANGED FOR X CO. TO PURCHASE
INSURANCE SO THAT FUNDS WOULD BE AVAILABLE FOR THE PURCHASE OF THE DECEASED'S SHARES.
(E) IN JULY, 1989, A WAS DIAGNOSED AS SUFFERING FROM A TERMINAL ILLNESS AND IN JULY OF 1990, HE DIED. UNDER A'S WILL ALL OF HIS ASSETS PASSED TO HIS WIDOW.
QUESTION 1 THE NORMAL RULE IS THAT TO QUALIFY FOR THE $400,
000 EXEMPTION IN RESPECT OF SHARES THEY CANNOT HAVE
BEEN OWNED BY AN UNRELATED PERSON WITHIN THE
PREVIOUS 24 MONTHS. NEW SHARES ISSUED BY A
CORPORATION ARE DEEMED TO HAVE BEEN OWNED BY AN
UNRELATED PERSON UNLESS THEY WERE ISSUED IN EXCHANGE
FOR SUBSTANTIALLY ALL OF THE ASSETS USED IN AN
ACTIVE BUSINESS. BY RETAINING THE BUILDING IN HIS
OWN NAME HAS A DENIED HIMSELF THE PROTECTION OF THIS
EXCLUSION?RESPONSE IF THE BUILDING WAS NOT A PARTNERSHIP PROPERTY THEN
APPARENTLY SUBSTANTIALLY ALL OF THE ASSETS USED IN
THE PARTNERSHIP BUSINESS WOULD BE TRANSFERRED TO THE
NEW CORP AND A HAS NOT DENIED HIMSELF THE PROTECTION
OF THE EXCLUSION. IN THE ABOVE SITUATION, IT APPEARS THAT A
PARTNERSHIP WAS CARRIED ON BY A, B, AND C AND THAT
THE BUILDING WAS EITHER RENTED TO THE PARTNERSHIP
OR USED ON A RENT-FREE BASIS BY THE PARTNERSHIP.
IN OTHER WORDS, THE BUILDING WAS NOT PARTNERSHIP
PROPERTY OR AN ASSET USED IN AN ACTIVE BUSINESS.
IN THESE CIRCUMSTANCES, IT IS THE DEPARTMENT'S VIEW
THAT THE ISSUED SHARES WOULD NOT BE DEEMED TO HAVE
BEEN OWNED BY AN UNRELATED PERSON BECAUSE THE SHARES
OF THE CORPORATION WERE ISSUED IN EXCHANGE FOR
SUBSTANTIALLY ALL OF THE ASSETS USED IN THE
PARTNERSHIPS ACTIVE BUSINESS.QUESTION 3 OUR INTERPRETATION OF QUESTION AND RESPONSE
PART OF THE THIRD QUESTION CONCERNS WHETHER THE X
CO. SHARES HAVE BEEN "VESTED INDEFEASIBLY" IN MRS.
A FOR THE PURPOSES OF THE SUBSECTION 70(6) IN VIEW
OF THE BUY-SELL AGREEMENT. IT DEPENDS STEER THE Buy SELL IS COMPULSORY IF THE
ESTATE MUST SELL THEN THERE IS NO INDEFEASIBLE
VESTING AS PER PARKES. IF THE AGREEMENT IS NOT
BINDING ON THE ESTATE AS IN VAN SON THEN
INDEFEASIBLE VESTING CAN TAKE PLACE IN RELATION TO THE "VESTED INDEFEASIBLY"
REQUIREMENT, IT APPEARS THAT THE TERMS OF THE BUY-
SELL MERELY GIVES B AND C THE OPTION TO ACQUIRE THE
SHARES WITH THE RESULT THAT THE BUY-SELL AGREEMENT
MAY OR MAY NOT BE EXERCISED. IN THESE CIRCUMSTANCES IT IS THE DEPARTMENT'S VIEW THAT THE BUY-SELL
AGREEMENT WOULD NOT PREVENT THE X CO. SHARES FROM
BEING VESTED INDEFEASIBLY IN THE SPOUSE. HOWEVER,
IF THE TERMS OF THE BUY-SELL AGREEMENT MADE IT
COMPULSORY FOR THE EXECUTOR OF A'S ESTATE TO SELL
AND A AND C TO BUY THE X CO. SHARES, THE
DEPARTMENT'S VIEW IS THAT THE SHARES WOULD NOT VEST
INDEFEASIBLY IN THE SPOUSE AND NO ROLLOVER WOULD BE
AVAILABLE. I WOULD ALSO ADD THAT MY COMMENTS ARE CONSISTENT
WITH THE PARKS ESTATES DECISION (
86 DTC 1214) WHICH
DEALT WITH A COMPULSORY SALE OF SHARES. A RECENT
CASE IN THE FEDERAL COURT TRIAL DIVISION VAN SON
ESTATE HELD THAT AS THERE WAS NO ENFORCEABLE
OBLIGATION ON THE PART OF THE ESTATE TO SELL THE
SHARES THE SHARES VESTED. THE SECOND PART OF THE THIRD QUESTION CONCERNS
WHETHER A COULD USE THE $400,000 CAPITAL GAINS
EXEMPTION IN THE YEAR OF DEATH ASSUMING THE ROLLOVER
PROVISIONS OF SUBSECTION 70(6) DON'T APPLY. IN
RELATION TO THIS POINT, THE ISSUE IS WHETHER "ALL
OR SUBSTANTIALLY ALL" OF X CO.'S ASSETS WERE USED
IN AN ACTIVE BUSINESS AT THE TIME OF THE DEEMED
DISPOSITION UNDER SUBSECTION 70(5) IN VIEW OF THE
LIFE INSURANCE POLICY. INSURANCE POLICY WILL NOT BE AN ACTIVE BUSINESS
ASSET AND WILL BE INCLUDED IN THE CORP'S ASSETS AT
ITS FAIR MARKET VALVE WHICH IN THIS CASE WILL BE
CLOSE TO ITS FACE VALuE. AS IT APPEARS THAT THE LIFE INSURANCE PROCEEDS WILL
BE PAID OUT AS DIVIDEND TO FUND THE BUY-SELL
AGREEMENT, IT IS THE DEPARTMENT' S VIEW THAT THE
LIFE INSURANCE POLICY WOULD NOT BE CONSIDERED TO BE
AN ASSET USED IN AN ACTIVE BUSINESS. ACCORDINGLY,
FAIR MARKET VALUE OF THE LIFE INSURANCE POLICY'
ASSUMING IT REPRESENTS MORE THAN 10% OF THE FAIR
MARKET VALUE OF X CO.'S ASSETS AT THE TIME OF THE
DEEMED DISPOSITION, WOULD RESULT IN THE "ALL OR
SUBSTANTIALLY ALL" REQUIREMENT NOT BEING SATISFIED.
AS A FURTHER COMMENT, IT WOULD APPEAR THAT IN VIEW
OF MR. A'S STATE OF HEALTH PRIOR TO DEATH, THE
INSURANCE POLICY WOULD BE VALUED AS AN AMOUNT CLOSE
TO ITS VALUE AT MATURITY.QUESTION 4 ASSUMING THAT MRS. A ACQUIRES THE X CO. SHARES UNDER
THE ROLLOVER PROVISIONS OF SUBSECTION 70(6). THE
ISSUE IS WHETHER MRS. A, IN VIEW OF THE LIFE
INSURANCE POLICY, CAN USE THE $400,000 CAPITAL GAINS
EXEMPTION WHEN SHE SELLS THE X CO. SHARES TO B AND
C.RESPONSE OBVIOUSLY THE PROCEEDS OF THE INSURANCE WOULD NO
LONGER BE IN THE CORP TO PUT IT OFFSIDE HOWEVER THEY
WOULD EAR BEEN DURING THE LAST 24 MONTHS AND
THEREFORE EAR THE POTENTIAL OF PUTTING THE CORP
OFFSIDE. THE DEPARTMENT'S VIEW ON THIS ISSUE IS THAT THE
LIFE INSURANCE PROCEEDS WERE RECEIVED AND PAID OUT
AS A DIVIDEND PRIOR TO THE SALE, THEY WOULD HAVE NO
EFFECT ON DETERMINING WHETHER X CO. WAS A SMALL
BUSINESS CORPORATION AT THE TIME OF SALE. HOWEVER, IT IS POSSIBLE THAT X CO., AS A
CONSEQUENCE OF HAVING RECEIVED THE PROCEEDS PRIOR
TO THE SALE, WOULD FAIL TO HAVE USED MORE THAN 50%
OF ITS ASSETS IN AN ACTIVE BUSINESS THROUTHOUT THE
SPECIFIED TIME PERIOD PRIOR TO THE SALE. IF THIS
WERE TO BE THE CASE, IT WOULD NOT BE POSSIBLE FOR A
SHARE OF X CO. TO BE A QUALIFYING SMALL BUSINESS
CORPORATION SHARE FOR AT LEAST TWO YEARS FROM THE
TIME X CO. AGAIN COMMENCED TO MEET THAT 50% TEST.QUESTION 5 THE INITIAL SCENARIO HAS BEEN MODIFIED AS THAT EACH
OF A, B, AND C USED A HOLDING CORPORATION TO HOLD
HIS SHARES OF X CO. AND THE INSURANCE ON THE LIVES
OF THE OTHERS. THE QUESTION THEN BECOMES WHETHER A
SHARE IN A'S COMPANY (ACO) IS A QUALIFIED SMALL
BUSINESS CORPORATION SHARE. RESPONSE INSURANCE PROCEEDS WOULD BE IN OTHER CORPS
THEREFORE NO PROBLEM THERE. INSURANCE POLICIES HELD
BY A CO. WOULD BE OFFSIDE ASSETS IN THIS TYPE OF SITUATION IT IS THE DEPARTMENT'S
VIEW THAT THE INSURANCE POLICIES ON A'S LIFE AND THE
PROCEEDS THEREOF WOULD NOT BE A FACTOR IN
DETERMINING WHETHER ACO WAS A SMALL BUSINESS
CORPORATION AT THE TIME OF SALE BY MRS. A BECAUSE
THOSE ASSETS WOULD BELONG TO THE HOLDING COMPANIES
OF B AND C. HOWEVER, THE POLICIES ON THE LIVES OF B AND C HELD
BY ACO WOULD HAVE TO BE VALUED, AS THESE WOULD NOT
BE ASSETS USED IN AN ACTIVE BUSINESS. THE USUAL
TESTS WOULD HAVE TO BE APPLIED TO DETERMINE WHETHER
THE SHARES OF ACO WERE QUALIFIED SMALL BUSINESS
CORPORATION SHARES AT THE RELEVANT TIME.QUESTION 6 COULD BOTH MR. A AND MRS. A UTILIZE THE CAPITAL
GAINS EXEMPTION UTILIZING SUBSECTION 70(6.2). UNDER
THIS PROVISION, AN ELECTION CAN BE MADE IN RESPECT
OF ANY PROPERTY SO THAT THE PROVISIONS OF SUBSECTION
70(5) APPLY RATHER THAN THE ROLLOVER PROVISIONS OF
SUBSECTION 70(6).RESPONSE EACH SHARE IS CONSIDERED TO BE A SEPARATE PROPERTY
SO IT IS POSSIBLE TO ELECT ON SOME AND NOT OTHERS
AND DOUBLE UP THE EXEMPTION. IN RELATION TO THE PROVISIONS OF SUBSECTIONS 70(6)
AND 70(6.2), IT IS THE DEPARTMENT'S VIEW THAT MRS.
A, AS A'S EXECUTOR, COULD ELECT OUT OF THE AUTOMATIC
INTER-SPOUSAL ROLLOVER PROVISIONS PURSUANT TO
SUBSECTION 70(6.2) IN RESPECT OF SOME OF MR. A'S X
CO. SHARES AND NOT OTHERS AS EACH SHARE IS
CONSIDERED TO BE A SEPARATE PROPERTY. THE EFFECT
OF ACHIEVING THIS RESULT IS THAT IT MAY BE POSSIBLE
FOR BOTH MR. A AND MRS. A TO UTILIZE THE $400,000
CAPITAL GAINS EXEMPTION.FACT SITUATION II
SAME AS 1 EXCEPT THAT
1) A HAD TRANSFERRED THE BUILDING TO X CO AT THE
BEGINNING BUT 11) NO INSURANCE OR BUY-SELL AGREEMENT WAS IN PLACE AT
HIS DEATH B, C, AND MRS A AGREE THAT THEY WOULD LIKE TO DISTRIBUTE
THE BUILDING TO MRS A IN SATISFACTION OF THE 60% INTEREST
IN X CO WHICH SHE INHERITED FROM A. THE BUILDING
REPRESENTS 60% OF X CO'S TOTAL ASSETS.QUESTION 1 MAY THE BUILDING BE BUTTERFLIED TO A NEW CORP
CONTROLLED BY MRS A THE WIDOW?OUR INTERPRETATION OF THE QUESTION
-IF THE BUILDING IS TRANSFERRED BY WAY OF A SINGLE
WINGED BUTTERFLY OF X CO TO A NEW HOLDING CO A CO
TO WHICH MRS A HAS TRANSFERRED HER SHARES OF X CO
WILL THE DIVIDENDS DEEMED TO BE PAID ON THE CROSS
REDEMPTION OF SHARES OF X CO AND A CO BE EXEMPT FROM
THE APPLICATION OF 55 (2) BY VIRTUE OF 55 (3) (B)RESPONSE YES ASSUMING TEAT THE BUILDING AND ALL OF THE OTHER
PROPERTY OF CO CONSTITUTED BUSINESS PROPERTY FOR
THE PURPOSES OF 55 (3) (B)QUESTION 2 ASSUMING ANSWER TO QUESTION 1 IS YES BECAUSE THE
BUILDING AND OTHER ASSETS OF X CO WERE ALL BUSINESS
ASSETS WOULD THE ANSWER BE DIFFERENT IF TWO MONTHS
BEFORE A DIED X CO MOVED TO RENTAL PREMISES AND
LEASED THE BUILDING TO AN ARMS LENGTH TENANT? OR
WOULD THE BUTTERFLY RULES NOT APPLY HERE BECAUSE: -THE BUILDING IS NOW AN INVESTMENT PROPERTY
AND A PRO RATA SHARE IS NOT BEING DISTRIBUTED
TO EACH SHAREHOLDER AS REQUIRED TO MEET THE
EXCLUSION UNDER 55 (3) (B) AND -THE PARTIES CANNOT RELY ON THE NON ARMS
LENGTH EXEMPTION IN 55 (3) (A) SINCE THE
BROTHERS ARE DEEMED TO DEAL WITH EACH OTHER AT
ARMS LENGTH FOR PURPOSES OF THE BUTTERFLY
RULES AND MRS A CEASES TO BE RELATED ONCE A
DIESRESPONSE YES THE ANSWER WOULD BE DIFFERENT FOR THE ABOVE
REASONS AS THE SERIES OF TRANSACTIONS THAT INCLUDES THE
DIVIDENDS WOULD RESULT IN' AN INCREASE IN THE
PERCENTAGE INTEREST IN X CO BY B AND C WHO WOULD BE
DEEMED TO DEAL AT ARMS LENGTH BY 55 (5) (E) THE
DIVIDENDS WOULD NOT QUALIFY FOR THE EXEMPTION IN 55
(3) (A)QUESTION 3 OUR INTERPRETATION OF THE' QUESTION
WOULD THE RESPONSE TO QUESTION 2 BE DIFFERENT IF
A'S SHARES OF X CO WERE BEQUEATHED TO A SPOUSAL
TRUST FOR MRS A WITH A'S FATHER APPOINTED AS SOLE
TRUSTEERESPONSE YES THE ANSWER WOULD BE DIFFERENT
A'S FATHER IS RELATED TO A'S BROTHERS AND SUBJECT
TO THE TERMS OF THE TRUST CONTROLS BOTH A CO AND X
CO THEREFORE (SUBJECT TO 55 (4) )EACH OF THE BROTHERS
WOULD BE DEEMED NOT TO DEAL AT ARMS LENGTH WITH A
CO AND X CO THUS DIVIDENDS WOULD QUALIFY FOR THE EXEMPTION IN
55 (3) (A) 55 (4) COULD BE APPLIED IF IT WAS CONSIDERED THAT
THE PRINCIPAL PURPOSE OF ESTABLISHING THE SPOUSAL
TRUST WITH A'S FATHER AS THE TRUSTEE WAS TO CAUSE
THE BROTHERS TO BE RELATED AND NOT DEAL AT ARMS
LENGTH. 55 (4) DEEMS THEM TO DEAL AT ARMS LENGTH.
FUTURE EVENTS SUCH AS THE DISTRIBUTION OF THE TRUST
CAPITAL TO MRS. A COULD BE AN INDICATION ON INTENT.
CAUTION
THE EXEMPTION IS AVAILABLE PROVIDED THAT THE
BUTTERFLY TRANSACTIONS THAT RESULT IN THE DEEMED
DIVIDENDS ARE NOT PART OF A LARGER SERIES OF
TRANSACTIONS THAT RESULTS IN THE DISPOSITION OF
PROPERTY TO, OR AN INCREASE IN INTEREST IN ANY
CORPORATION BY, A THIRD PARTY WHO DEALS AT ARMS
LENGTH WITH A CO OR X COQUESTION 4 OUR INTERPRETATION OF THE QUESTION
WOULD ANY FUTURE SALE OF THE SHARES OR ASSETS OF A
CO TO AN ARMS LENGTH THIRD PARTY BE CONSIDERED TO
BE PART OF A SERIES OF TRANSACTIONS THAT INCLUDED
THE DEEMED DIVIDENDS OR WOULD SUCH A FUTURE SALE
HAVE TO BE SPECIFICALLY CONTEMPLATED AT THE TIME OF
SUCH DIVIDENDS IN ORDER TO BE CONSIDERED TO BE PART
OF THE SERIESRESPONSE 248 (10) DEEMS A SERIES OF TRANSACTIONS TO INCLUDE
TRANSACTIONS OR EVENTS COMPLETED IN CONTEMPLATION
OF THE SERIES. OUR VIEW IS THAT A PRELIMINARY TRANSACTION WILL FORM
PART OF A SERIES IF AT THE TIME THE PRELIMINARY
TRANSACTION IS CARRIED OUT THE TAXPAYER INTENDS TO
IMPLEMENT SUBSEQUENT TRANSACTIONS AND THIS IN FACT
HAPPENS THE FACT THAT THE TAXPAYER MAY NOT HAVE DETERMINED
ALL OF THE IMPORTANT ELEMENTS; FOR EXAMPLE
IDENTIFIED A THIRD PARTY, OF THE SUBSEQUENT
TRANSACTION WOULD NOT PREVENT THE PRELIMINARY
TRANSACTION FROM BEING PART OF A SERIESA'S FATHER'S INTENTION IS THE KEY FACTOR
2. SALARIES, BONUSES, USE OF CORPORATE ASSETS
QUESTION 1 SIZE OF BONUS A SOLE OWNER MANAGER MAY PAY
HIMSELFRESPONSE - THE REASONABLENESS TEST OF SEC 67 COULD HAVE
APPLICATION TO ANY EXPENSE - GENERALLY WE WOULD NOT SEEK TO APPLY SEC 67 IN
RESPECT OF A BONUS TO AN OWNER/EMPLOYEE WHERE HE IS
ACTIVE IN THE BUSINESSQUESTION 2 GUIDELINES FOR REASONABLENESS OF SALARIES PAID
TO FAMILY MEMBERS WHO ARE NOT ACTIVE IN THE
BUSINESS FOR EXAMPLE SPOUSES WHO COME IN ONCE
A WEEK TO SIGN CHEQUES OR CHILDREN WHO HAVE
SUMMER JOBSRESPONSE - WE WOULD CONSIDER THAT AN AMOUNT THAT WOULD BE
PAID IN AN ARMS LENGTH TRANSACTION WOULD BE
REASONABLE- REFER TO MADUKE CASE DTC 89 DTC 5458 FC TD
QUESTION 3 VALUATION OF BENEFIT FOR' CORPORATE OWNED
PROPERTY USED BY SHAREHOLDER. WHERE THE
SHAREHOLDER CONTRIBUTES THE FUNDS TO
PURCHASE THE ASSET THAT IS USED COULD ONE LOOK
AT THE FINANCIAL ADVANTAGE THAT IS GAINED BY
THE SHAREHOLDER AS THE BENEFIT RATHER THAN
USING FAIR MARKET VALUE OR A RETURN ON
INVESTMENT VALUATIONRESPONSE -THERE ARE A NUMBER OF CASES ON THIS ISSUE, YOUNGMAN
AND WOODS BEING THE MOST RECENT. THESE HELD THAT
THERE IS A FMV BENEFIT OR A RETURN ON INVESTMENT
BENEFIT. -THE U.S. CONDO POSITION WAS TAKEN IN 1980 IN
RESPECT OF A SPECIFIC RULING AND WAS NOT MEANT TO
BE ANY BROADER. IT IS ANTICIPATED THAT THE CANADA
U.S. TAX AGREEMENT WILL BE AMENDED SOON TO RECOGNIZE
CERTAIN TAXES PAID IN THE OTHER JURISDICTION. WHEN
THIS HAPPENS THERE WILL NO LONGER BE A NEED FOR OUR
ADMINISTRATIVE POSITION. -OUR VIEW IS THAT THE SEPARATE CORPORATE ENTITY MUST
BE RECOGNIZED AND THE VALUE OF A BENEFIT IS NOT
RELATED TO HOW MUCH YOU HAVE INVESTED IN THE
COMPANY. WHERE THE CORP IS OTHER THAN A SOLE PURPOSE
CORP IT IS LIKELY DIFFICULT TO TRACK FUNDS. -THIS QUESTION HAS BEEN RAISED IN ANOTHER FORUM AND
THE DEPARTMENT HAS UNDERTAKEN TO REVIEW THE ISSUE.
ANY CHANGE IN POSITION WILL LIKELY BE ANNOUNCED IN
AN IT BULLETIN QUESTION 4 RE U.S. PERSONAL USE PROPERTY ADMINISTRATIVE
POSITION. AT 89 CTF REVENUE SAID THAT THERE WAS
NO CHANGE IN POSITION HOWEVER WE UNDERSTAND
THAT THE POSITION WILL NOT APPLY IF THE
PROPERTY IS ROLLED TO THE CORP. -THIS ADMINISTRATIVE POSITION WAS TAKEN IN A
PARTICULAR CASE AND INVOLVED THE PURCHASE OF A
PROPERTY AT FAIR MARKET VALUE -THE DEPARTMENT HAS NEVER CONSIDERED IT APPROPRIATE
IN A SECTION 85 SITUATION - THE EXAMPLE OF PROTECTING THE PRINCIPAL RESIDENCE
EXEMPTION IS ENOUGH REASON TO MAKE THIS EXTENSION
OFFENSIVEPENSION FUND INVESTMENTS
QUESTION IS EITHER THE DEPARTMENT OF FINANCE OR REVENUE
CANADA AWARE OF ANY SITUATION IN WHICH A SMALL
BUSINESS HAS ATTEMPTED TO ACCESS FUNDS IN RRSP'S OR
PENSION PLANS BY WAY OF SMALL BUSINESS INVESTMENT
CORPS, SMALL BUSINESS INVESTMENT TRUSTS, OR SMALL
BUSINESS INVESTMENT LIMITED PARTNERSHIPS? IS IT
POSSIBLE THAT MORE DIRECT ACCESS TO THESE FUNDS
COULD BE INTRODUCED?RESPONSE WE HAVE ISSUED TWO RULINGS FOR SMALL BUSINESS
INVESTMENT LIMITED PARTNERSHIPS AND ONE FOR A SMALL
BUSINESS INVESTMENT CORP.WE HAVE HAD A LARGE NUMBER OF GENERAL INQUIRIES
SUPPLEMENTARY QUESTIONS
QUESTION 1 WHERE AN INDIVIDUAL OR A CORPORATION TRANSFERS
PROPERTY TO A CORPORATION ALL OF WHOSE SHARES
HE OR IT ALREADY ,OWNS, WILL RCT INVOKE THE
"BENEFIT" PROVISIONS IF THE VALUE OF THE
SPECIFIC SHARE OR SHARES TAKEN BACK ON THE
TRANSFER IS LESS THAN THE VALUE OF THE
TRANSFERRED ASSETS? THE VALUE OF THE
TRANSFEROR'S ASSETS HASN'T CHANGED.RESPONSE THIS WAS RAISED AT THE 89 CTF
85 (1) (E. 2) APPLIES WHERE IT APPEARS REASONABLE TO
CONCLUDE THAT THE EXCESS IS A BENEFIT THAT THE
TAXPAYER WISHES TO CONFER ON THE CORPORATION. IN OCTOBER 89 DEPT. OF FINANCE ANNOUNCED THAT THEY
WOULD RECOMMEND A CHANGE TO 85 (1) (E.2) TO PERMIT
THIS TYPE OF TRANSACTION BETWEEN A PARENT AND
SUBSIDIARY CORP.QUESTION 2 BEFORE IMPLEMENTING AN ESTATE FREEZE FATHER HAD A
VALUATION OF HIS SHARES PREPARED BY A FIRM OF
BUSINESS VALUATORS. ON THE CORP REORG HE TOOK BACK
SHARES HAVING A VALUE EQUAL TO THE VALUATOR'S
OPINION AS TO THE VALUE OF HIS OLD SHARES. IF
SUBSEQUENTLY IT IS DETERMINED THAT THE OLD SHARES
HAD A GREATER VALUE, IS IT "REASONABLE TO REGARD"
THE EXCESS AS A BENEFIT THAT FATHER "DESIRED TO
HAVE CONFERRED" ON HIS CHILDREN WHO ARE THE COMMON
SHAREHOLDERS?RESPONSE WE HAVEN'T DEALT WITH THIS BEFORE
DEPENDING ON THE CIRCUMSTANCES IT MAY BE REASONABLE
TO REGARD THAT FATHER MAY HAVE WISHED TO CONFER A
BENEFIT DESPITE THE VALUATOR'S REPORT.QUESTION 3 IT 169 STATES THAT REVENUE CANADA WILL ACCEPT A
FORM OF PRICE ADJUSTMENT CLAUSE UNDER WHICH THE
PARTIES AGREE TO ACCEPT RCT'S DETERMINATION OF
VALUE. IS THIS THE ONLY FORM OF PRICE ADJUSTMENT
CLAUSE THAT RCT WILL RECOGNIZE AS VALID.RESPONSE WE WILL RECOGNIZE CLAUSES MEETING ALL THE
REQUIREMENTS SET OUT IN THE BULLETIN. IF THERE IS
SOME OTHER POSITION DESIRED IT SHOULD BE SUBMITTED
FOR OUR REVIEW.