C. Savage (613) 993-6201
November 6, 1985
Dear Sirs:
Re: Cost of Shares Sold on Instalment Basis -------------------------------------------
This is in response to your letter of September 13, 1985 wherein you requested our views regarding the cost for purposes of the Income Tax Act (the "Act"), of shares which are sold on an instalment basis.
As an example you refer to the sale of shares pursuant to a prospectus (which you did not enclose for our review). Under the prospectus, the shares were sold for $26 per share, with $13 of the price payable at the time of sale and the remaining $13 in six months. Under the arrangement, the seller of the share will have no recourse to the purchaser for any unpaid instalment but only to the pledged share. The purchase of a share is evidenced by the issue of an instalment receipt to the purchaser which receipt is listed on a stock exchange and may be traded. The shares are pledged by the purchaser to secure the obligation to pay the final instalment price and, pursuant to the pledge agreement, the share certificates are retained by the seller or a trustee. Under this arrangement, the shares remain as security but may effectively be traded through the instalment receipts. All of the incidents of ownership of the shares pass to the purchaser at the time of sale.
You have requested that we confirm that:
i) the cost of a share acquired pursuant to the arrangement described will be the amounts actually paid by the purchaser and will not include the amount of any instalment owing which has not been paid, and
ii) shares purchased under such an arrangement and other shares of the same class of that issuer previously acquired by the purchaser will be identical properties for the purposes of section 47 of the Act.
We are unable to provide the confirmations which you requested. A confirmation of the results for tax purposes of a particular arrangement could only be given after a review of all of the relevant documentation on submission of a request for an advance income tax ruling. We are not in a position to be able to comment on any aspects of the specific offering to which you refer.
In our opinion the cost of a share can only include amounts which the purchaser has paid for the share or has the obligation to pay. If the vendor of the share has no recourse to the purchaser for any additional instalments of the purchase price but can only realize on his security (i.e. the pledged share) only the amounts actually paid would be added to the cost of the share as they are paid or become payable.
As stated in IT-387R two properties which are otherwise identical do not cease to be so merely because one is subject to a charge or other external condition which may affect its price and the other is not, provided the external condition does not change any of the constituent elements of the particular property. The rules in the Act for determining the adjusted cost base of identical properties will apply to a holder who acquires shares which are subject to certain conditions such as a pledge or a contingent requirement to pay an additional amount and who also holds shares which are identical and are not subject to those conditions.
We hope this will be of assistance.
Yours truly,
for Director Specialty Corporations Rulings Division Corporate Rulings Directorate Legislative and Intergovernmental Affairs Branch