Frank S. Gillman (613) 957-8953
November 16, 1988
Dear Sirs,
This is in respect to your letters dated July 26 and September 20, 1988, wherein you requested our opinion with regards to a proposed transaction involving a transfer of shares into a corporation which would be effected for tax purposes using subsection 85(1) of the Income Tax Act (the "Act").
As expressed at paragraph 3 of Information Circular 70-6R dated December 18, 1978, the Department will not express opinions on definite transactions that are being proposed other than by way of an advance income tax ruling, nor will the Department provide rulings on completed transactions.
Nevertheless, the following general comments for your assistance are being expressed.
In a situation like the one described in your letter, the Department would consider the application of subsections 110.6(7) to (11) of the Act, which contain rules preventing an individual from claiming a capital gains exemption (the anti-avoidance provisions of the Act regarding the capital gains exemption). In general, these rules will deny an individual from claiming the capital gains exemption when the capital gain the individual is claiming was transmogrified into a gain in order to qualify for the exemption. This transformation may be performed in many ways and are more fully explained in the legislation itself.
Other consideration would be given to the possible application of sections 74.1, 74.2, 74.3, 74.4 and 74.5 of the Act which are a comprehensive set of rules designed to prevent the splitting of income through the transfer of property by an individual to a spouse or to a person under 18 years of age. These rules have been formulated to include any such apportionment of income even when it is performed via a trust or a corporation except under limited circumstances.
In response to your query regarding the general anti-avoidance rules of section 245 of the Act, we direct your attention to Information Circular 88-2 dated October 21, 1988. This circular which has recently been released by the Department will provide you with some guidance with respect to the application of the section.
We trust that our comments herein clarify these issues.
for Director Bilingual Services and Resources Industries Division Rulings Directorate