D.S. Delorey (613) 957-2125
January 16, 1987
Dear Sirs:
This is in reply to your letter of October 1, 1986 concerning the provisions of subsection 110.6(8) of the Income Tax Act (the "Act").
You are concerned with a situation where employees own participating shares that are not prescribed shares for the purposes of subsection 110.6(8) of the Act. The shares do not have an automatic right to a dividend. They are similar to common shares except that they do not participate in gains or losses on certain real estate property. If prudent financial management provides that no dividends are paid on the shares, you wonder if subsection 110.6(8) would apply to deny a capital gains deduction to an employee who sells his shares when there are retained earnings on hand which would be distributed on a liquidation, or redemption of the share.
We are not ab1e to reply specifically to your question because it would require a determination of all relevant facts. If a specific proposed transaction is involved, which appears to be the case, you might wish to consider requesting an advance income tax ruling with respect thereto. We will consider the matter on a rulings basis if all relevant facts are determinable at the advance ruling stage.
The comments on page 78 of the November 1985 "Technical Notes to a Bill Amending the Income Tax Act and Related Statutes" contain an example of a situation in which subsection 110.6(8) of the Act would apply to deny a capital gains deduction under subsection 110.6(3) of the Act.
We trust that these comments will be of assistance.
Yours truly,
for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch
110.6(8) 110.6(9)