Principal Issues: Whether section 51 of the Act would apply to the “exchange” of common shares of the capital stock of a corporation for preferred shares and common shares of the capital stock of the same corporation as described in the technical interpretation 2004--0092561E5.
Position: No.
Reasons: Wording of the Act and prior CRA’s position.
FEDERAL TAX ROUNDTABLE, NOVEMBER 2, 2023
APFF CONFERENCE 2023
4. Section 51 I.T.A.
n Technical Interpretation 2004-0092561E5, (footnote 1) the CRA indicated that the "exchange" of 100 common shares for 500,000 preferred shares and 100 common shares (identical in all respects to the common shares exchanged) followed by the cancellation of the 100 common shares initially issued does not constitute a disposition for the purposes of the Income Tax Act (footnote 2. Therefore, the election under subsection 85(1) cannot be made in respect of that exchange.
Question to CRA
Is the CRA of the view that subsection 51(1) applies to such a share exchange?
CRA's response
Section 51 is part of subdivision c of Division B of Part I of the Income Tax Act applicable to the treatment of taxable capital gains and allowable capital losses. In general, the purpose of section 51 is to allow the transfer of property on a tax-deferred basis where a taxpayer acquires from a corporation a share of the capital stock of the corporation in exchange for "convertible property" within the meaning of subsection 51(1), which share must be the only consideration received in exchange for the property. The convertible property must also constitute capital property to the taxpayer for subsection 51(1) to apply.
Subsection 51(1) applies automatically where the conditions are satisfied. However, by virtue of subsection 51(4), subsection 51(1) will not apply to an exchange to which subsection 85(1) or 85(2), or section 86 applies.
Pursuant to paragraph 51(1)(a), except for the purposes of subsections 20(21), 44.1(6) and 44.1(7), and paragraph 94(2)(m), the exchange is deemed not to be a disposition of the convertible property.
The CRA is of the view that section 51 should apply only where the exchange results in a disposition of the convertible property.
Furthermore, an exchange of shares that does not result in a disposition of the convertible property would not result in a capital gain or loss to the taxpayer.
Nathalie Aubin
November 2, 2023
2023-098278
FOOTNOTES
Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:
1 CANADA REVENUE AGENCY, Technical Interpretation 2004-0092561E5, November 10, 2004.
2 R.S.C. (1985), Ch. 1 (5th Supp.) ("I.T.A.").