24 January 1990 Income Tax Severed Letter AC592455 - Capital Gains Deduction - Prescribed Share

5-9245
                                                  D. Watson
                                                  (613) 957-2121

Dear Sirs:

Re: Subsection 6205(2) of the Income Tax Regulations

This is in response to your letter dated December 7, 1989 in which you asked for our opinion regarding the interpretation of certain provisions of the Income Tax Act (the "Act") and the Income Tax Regulations (the "Regulations").

Paragraph 6205(2)(a) of the Regulations provides that shares such as preferred share, which would not otherwise qualify as proscribed shares for the purposes of subsection 110.6(8) of the Act, would be prescribed shares where they are issued in accordance with the provisions of that paragraph. One such provision and the subject of your question is that the "other shares" be issued to "another shareholder" of the corporation.

In our opinion, where a person who did not deal at arm's length with the original shareholder receives new common shares as part of the "arrangement", as that term is used in paragraph 6205(2)(a) of the Act, that person becomes a shareholder and is "another shareholder" for the purposes of that paragraph. The person need not have owned shares of the corporation prior to the commencement of the "arrangement".

These comments represent our general views with respect to the subject matter of your letter and are expressed in accordance with the guidelines set out in Information Circular 70-6R dated December 18, 1978. The facts of a particular situation may lead to a different conclusion.

Yours truly,

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