ARCHIVED - Transfer of Property to a Corporation under Subsection 85(1)

What the "Archived Content" notice means for interpretation bulletins

NO: IT-291R3

DATE: January 12, 2004

SUBJECT: INCOME TAX ACT
Transfer of Property to a Corporation under Subsection 85(1)

REFERENCE: Subsection 85(1) (also sections 22, 54, 85.1 and 251.1, subsections 6(2), 8(7), 13(21.2), 14(5), 14(12), 15(1), 24(1), 28(1), 28(1.2), 40(3.4), 66(5), 66(15), 69(11), 84(1), 84(3), 84(5), 85(1.1), (1.11), (1.2), (1.3), (2.1), (5) and (5.1), 89(1), 138(12), 142.2(1), 245(2), 248(1), and 256(5.1) and paragraphs 8(1)(r), 13(7)(e), 14(1)(b), 20(1)(a), (b), (l) and (p), 53(1)(c) and (f) and subparagraph 40(2)(g)(i) of the Income Tax Act (the “Act”) and subsection 7307(1) of the Income Tax Regulations (the “Regulations”))

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Transfer of Property to a Corporation under Subsection 85(1)

Contents

• Application
• Summary
• Discussion and Interpretation
  • Definitions
  • General Comments (¶ 1)
  • Transferor (¶ 2)
  • Transferee (¶ 3)
  • Eligible Property (¶s 4-9)
  • Limits for Agreed Amount (¶s 10-14)
  • Transfers of Depreciable and Eligible Capital Property (¶s 15-16)
  • Excess Liabilities (¶ 17)
  • Benefits Conferred on a Related Person (¶ 18)
  • Passenger Vehicles (¶ 19)
  • Shares of the Transferor (¶ 20)
  • Cost to Transferor of Consideration Received from the Corporation (¶ 21)
  • Loss From Disposition of Property (¶s 22-25)
  • Rollovers of Capital Property (¶ 26)
  • Taxable Canadian Property (¶ 27)
  • Contribution of Capital (¶ 28)
  • Reduction of Paid-up Capital (¶ 29)
  • Deemed Capital Cost Allowance (¶s 30-31)
  • Subsequent Dispositions of Eligible Capital Property (¶ 32)
  • Anti-Avoidance Rules (¶s 33-34)
  • Administrative Matters (¶s 35-37)
• Explanation of Changes

Application

This bulletin cancels and replaces IT-291R2 dated September 16, 1994. The effective date of a particular legislative provision discussed in the bulletin may be indicated in the Explanation of Changes section (or, in some cases, in the Discussion and Interpretation section) of the bulletin. However, where the bulletin is silent with respect to the effective date of a particular provision, such date can be obtained from the legislation itself. Unless otherwise stated, all statutory references throughout the bulletin are to the Act.

Summary

This bulletin discusses the rollover provisions of the Act whereby a taxpayer may elect to transfer “eligible property” to a taxable Canadian corporation in exchange for consideration that includes at least one share of the corporation. “Eligible property” includes most capital property, Canadian or foreign resource property, eligible capital property and inventory, other than inventory that is real property. Where the taxpayer and the corporation agree upon an amount that does not exceed the fair market value of the property disposed of and is not less than the fair market value of any non-share consideration that is received, the amount agreed upon becomes, subject to certain specific limitations, the taxpayer's proceeds of disposition and the corporation's cost of the property. By choosing an appropriate amount within those limits the property can be transferred on a tax-deferred basis, that is, the corporation assumes the taxpayer's potential income tax liabilities for the property.

Discussion and Interpretation

Definitions

For the purposes of this bulletin:

All or substantially all – when the level of 90% of whatever is being measured is reached, the “all or substantially all” requirement is considered to have been met.

Non-share consideration means all the consideration received by the vendor other than shares of the transferee corporation or a right to receive such shares.

Share means a share or a fraction of a share of the capital stock of a corporation.

General Comments

¶ 1. The rules in subsection 85(1) enable a taxpayer (the transferor) to dispose of “eligible property” (see ¶ 4) to a taxable Canadian corporation (the transferee), as explained in ¶ 3, so that most, if not all, of the tax consequences which usually arise on such a disposition are shifted to the corporation from the taxpayer. The transferor is permitted to dispose of the property to the transferee for an “agreed amount” which may be other than the fair market value of either such property or the consideration received for it. This “agreed amount”, which is subject to the limitations explained in ¶ 10 through ¶ 14, generally becomes the proceeds of disposition of the property to the transferor and the cost to the transferee. It also establishes the cost of the consideration receivable by the transferor from the transferee in return for the property transferred to the transferee (see ¶ 21). Subsection 85(1) will apply in any case where

(a) the transferee is a taxable Canadian corporation (see ¶ 3),

(b) the property disposed of is “eligible property” described in subsection 85(1.1) (see ¶ 4),

(c) the transferor and the transferee make a valid joint election in the form authorized by the Minister (T2057) to invoke the provisions of subsection 85(1) (see ¶ 37),

(d) the consideration received by the transferor for the property disposed of to the transferee includes at least one share of the capital stock of the transferee, and

(e) in the case of depreciable property of a prescribed class, subsection 13(21.2) is not applicable (see ¶ 23).

Transferor

¶ 2. Subsection 85(1) applies to a transferor that is a “taxpayer”. “Taxpayer” is defined in subsection 248(1) to include any person whether or not liable to pay tax and, accordingly, includes individuals, corporations, and trusts. (Comments on the transfer of property to a corporation by a partnership under subsection 85(2) are contained in the current version of IT-378, Winding-up of a Partnership.)

Transferee

¶ 3. For subsection 85(1) to apply to a disposition of property the transferee must, at the time of the disposition, be a “taxable Canadian corporation” as defined in subsection 89(1). Basically this is a corporation that is a “Canadian corporation” not exempt from Part I tax. A “Canadian corporation” is defined in subsection 89(1) as being a corporation that at the relevant time is resident in Canada and was either incorporated in Canada or resident in Canada throughout the period commencing June 18, 1971 and ending at that time.

Eligible Property

¶ 4. Pursuant to subsection 85(1.1), “eligible property” for the purposes of subsection 85(1) means:

(a) a capital property (other than real property, an interest in real property or an option on real property, owned by a non-resident person), including

(i) depreciable property, whether or not of a prescribed class, (however subsection 13(21.2) will preclude the application of subsection 85(1) to dispositions of depreciable property of a prescribed class in certain instances—see ¶ 23), and

(ii) accounts receivable (other than those pertaining to a business which computes its income on the cash basis or those on which an election under section 22 has been made—see ¶ 8) where they are being transferred along with all or substantially all of the other assets relating to a taxpayer's business,

(b) a capital property that is real property, an interest in real property or an option on real property owned by a non-resident insurer where that property and the property received as consideration for it are designated insurance property (within the meaning assigned by subsection 138(12)) for the year,

(c) a Canadian resource property (see ¶ 6),

(d) a foreign resource property, (see ¶ 7)

(e) an eligible capital property,

(f) an inventory, including work in progress of a professional who has elected under paragraph 34(a), but excluding an inventory of real property, of interests in real property and options on real property,

(g) a property that is a security or debt obligation used or held by a taxpayer in the year in an insurance or money lending business, other than

(i) a capital property,

(ii) an inventory, or

(iii) a mark-to-market property (as defined in subsection 142.2(1)) of a financial institution

(g.1) a specified debt obligation (as defined in subsection 142.2(1)) of a financial institution (other than a mark-to-market property);

(h) a capital property that is real property, an interest or an option concerning such capital property, owned by a non-resident person (other than a non-resident insurer) and used in the year in a business carried on by the non-resident person in Canada, (see ¶ 9) or

(i) a net income stabilization account (NISA) Fund No. 2, as defined in subsection 248(1).

Refer to the current version of IT-176, Taxable Canadian property – Interests in and options on real property and shares, and IT-403, Options on real estate, for a discussion of the CCRA's interpretation of what constitutes an interest in or an option on real property.

Note 1: On October 11, 2002, a Notice of Ways and Means Motion to Amend the Income Tax Act was tabled in the House of Commons containing proposed legislation relating to non-resident trusts and foreign investment entities. One of the proposed amendments provides that for taxation years that begin after 2002, eligible property for the purposes of subsection 85(1) will not include property to which the proposed mark-to-market taxation regime for participating interests in foreign investment entities, under proposed subsection 94.2(4), applies.

¶ 5. Inventory of a taxpayer who follows the cash method of reporting income as provided in subsection 28(1) is defined to include the cost or value of the property that would have been relevant in computing the taxpayer's income if the income from the business had not been computed in accordance with the cash method, and for a farming business, includes all of the livestock held in the course of carrying on the business. Paragraph 85(1)(c.2) provides a calculation for determining the proceeds of disposition of inventory transferred to a corporation by a taxpayer who calculates income from a farming business according to the cash method. The amount determined by the calculation is deemed to have been received by the taxpayer as proceeds of disposition at the time of the transfer and to have been received by the taxpayer in the course of carrying on the farming business so that the agreed amount must be included in computing the taxpayer's income for the year which includes the date of the transfer under subparagraph 28(1)(a)(i). Similarly, where the inventory is owned by the corporation in connection with a farming business and the corporation calculates its income using the cash method, the amount is deemed to be an amount paid by the corporation at the time of the transfer and to have been paid in the course of its farming business.

The calculation under paragraph 85(1)(c.2) is generally as follows:

(A × B÷C) + D

where

A is the amount that would be included in the taxpayer's income by virtue of paragraph 28(1)(c) if the taxpayer's taxation year had ended immediately before the transfer,

B is the value (determined in accordance with subsection 28(1.2)) to the taxpayer of purchased inventory for which an election under subsection 85(1) is being made,

C is the value (determined in accordance with subsection 28(1.2)) to the taxpayer of all the purchased inventory that was owned by the taxpayer, and

D is such additional amount as the taxpayer and the corporation designate for the inventory transferred to the corporation.

In effect, D is the amount that the taxpayer could have elected to include in income for the year under paragraph 28(1)(b) for the transferred inventory if the year had ended immediately before the transfer. See the current version of IT-526, Farming – Cash Method Inventory Adjustments, for a discussion of the inventory adjustments under paragraphs 28(1)(b) and (c).

Further information is contained in the current versions of IT-427, Livestock of Farmers, and IT-433, Farming or Fishing – Use of Cash Method.

¶ 6. Canadian resource property, which is defined in subsection 66(15), may include real property. Consequently, notwithstanding the exclusion in paragraph 85(1.1)(f) concerning real property that is inventory, a taxpayer, including a dealer in Canadian resource property to which subsection 66(5) applies, may transfer real property that is Canadian resource property to a taxable Canadian corporation under subsection 85(1).

¶ 7. By virtue of subsection 85(1.11), a foreign resource property, or an interest in a partnership which derives all or part of its value from one or more foreign resource properties, will not be an eligible property for a transfer to a non-arm's length corporation where it may reasonably be considered that one of the purposes of the disposition, or series of transactions which includes the disposition, is to increase any person's entitlement to claim a foreign tax credit under section 126. This provision applies for dispositions occurring after December 21, 2000.

¶ 8. If accounts receivable of a taxpayer are being transferred to a corporation under subsection 85(1) as part of the transfer of all or substantially all of the taxpayer's business to the corporation, any loss on the sale will generally be a capital loss to the taxpayer. Where the purchase is on capital account and an election is filed under subsection 85(1), the transferee is not entitled to claim deductions under paragraph 20(1)(l) or (p) for a reserve for doubtful debts or bad debts on the accounts acquired and any gain or loss on realization of the accounts is a capital gain or loss. The use of the rollover provisions of subsection 85(1) precludes the use of a section 22 election for the accounts receivable. However, where the other assets of a business are being “rolled” under subsection 85(1), the accounts receivable may be sold using section 22 provided that no election under subsection 85(1) is filed for the receivables. See the current version of IT-188, Sale of Accounts Receivable, for a discussion of the election under section 22.

¶ 9. By virtue of subsection 85(1.2), an election under subsection 85(1) for property of a non-resident person described in 4(h) above may be made only if

(a) immediately after the disposition the transferee was controlled by

(i) the transferor,

(ii) a person or persons related (otherwise than by reason of a right referred to in paragraph 251(5)(b)) to the transferor, or

(iii) persons described in (i) and (ii);

(b) all or substantially all of the property used in the business carried on in Canada and in which the real property was used is disposed of by the transferor to the transferee; and

(c) the disposition was not part of a series of transactions that resulted in control of the transferee being acquired at any time after the disposition.

Limits for Agreed Amount

¶ 10. General Limits – Subsection 85(1) generally provides that the agreed amount can neither exceed the fair market value of the property disposed of (the upper limit under paragraph 85(1)(c)) nor be less than the fair market value of the non-share consideration received for it (the lower limit under paragraph 85(1)(b)). If the fair market value of the property disposed of is less than the fair market value of the non-share consideration received, the lesser amount must be the agreed amount (see 11 for an example).

Additional Limits –The agreed amount determined under the general limits is further subject to specific limits in paragraphs 85(1)(c.1), (d) and (e). These specific limits, which are in turn subject to paragraph 85(1)(e.3), provide that the agreed amount is compared with the fair market value of the property disposed of. As a result, a loss on disposition of the property can only be recognized where the property's fair market value at the time of disposition is less than the other specified limits in paragraphs 85(1)(c.1), (d) and (e) at the time of disposition. However, such loss may be denied as a result of the application of subsection 13(21.2), subsection 14(12), subparagraph 40(2)(g)(i) or subsection 40(3.4) as described in ¶s 22 to 25.

I – Interaction of paragraphs 85(1)(b), (c.1) and (e.3)

Paragraph 85(1)(c.1) applies in the calculation of the agreed amount on the disposition of

• inventory,
• capital property (other than depreciable property of a prescribed class - see the comments on paragraph 85(1)(e) below),
• a security or debt obligation used or held in an insurance or money lending business (other than a capital property, inventory or mark-to-market property of a financial institution),
• a specified debt obligation (other than a mark-to-market property) of a financial institution, and
• a NISA Fund No. 2.

Paragraph 85(1)( b ) provides that the lower limit is generally the fair market value of the non-share consideration received. However, paragraph 85(1)( c .1) stipulates an additional lower limit which is equal to the lesser of the fair market value of the property disposed of and the cost amount of that property. In the case of a conflict between the lower limits set out in paragraph 85(1)( b ) and paragraph 85(1)( c .1) as described above, paragraph 85(1)( e .3) provides that the agreed amount will be the greater of the two amounts.

See ¶ 12 for an example of the application of paragraph 85(1)(c.1).

II – Interaction of paragraphs 85(1)(b), (d) and (e.3)

Paragraph 85(1)(d) applies in the calculation of the agreed amount on the disposition of eligible capital property of a business. Paragraph 85(1)(b) provides that the lower limit is generally the fair market value of the non-share consideration received. However, paragraph 85(1)(d) sets out an additional lower limit which is equal to the least of

• 4/3 of the cumulative eligible capital of the business
• the fair market value of the property disposed of, and
• the cost of that property.

In the case of a conflict between the lower limits set out in paragraph 85(1)(b) and paragraph 85(1)(d) as described above, paragraph 85(1)(e.3) provides that the agreed amount will be the greater of the two amounts.

See ¶ 13 for an example of the application of paragraph 85(1)(d).

III – Interaction of paragraphs 85(1)(b), (e) and (e.3)

Paragraph 85(1)(e) applies in the calculation of the agreed amount on the disposition of depreciable property of a prescribed class. Paragraph 85(1)(b) provides that the lower limit is the fair market value of the non-share consideration received. However, paragraph 85(1)(e) establishes an additional lower limit which is equal to the least of

• the undepreciated capital cost of all the property of the class,
• the fair market value of the property disposed of, and
• the cost of that property.

In the case of a conflict between the lower limits set out in paragraph 85(1)(b) and paragraph 85(1)(e) as described above, paragraph 85(1)(e.3) provides that the agreed amount will be the greater of the two amounts.

See ¶ 14 for an example of the application of paragraph 85(1)(e).

Example of General Limits

¶ 11. This example demonstrates the tax effect where:

(a) the original agreed amount and

(b) the fair market value of the consideration

exceed

(c) the fair market value of the property transferred.

Assumptions

The type of eligible property is not relevant.

The agreed amount would be deemed by paragraph 85(1)(b) to be $149 except that paragraph 85(1)(c) (which deems the agreed amount to be $80) takes precedence over paragraph 85(1)(b). The excess of the fair market value of the total consideration received over the fair market value of the property transferred, $70, less any portion which may be deemed by section 84 to be a dividend is taxable in the hands of the transferor as a benefit pursuant to subsection 15(1). See the current version of IT-432, Appropriation of Property to Shareholders.

Example of the application of paragraph 85(1)(c.1)

¶ 12. This example demonstrates the tax effect where:

(a) the original agreed amount

is less than the lesser of

(b) the fair market value of the property and

(c) its cost amount.

Assumptions

The property is inventory or capital property other than depreciable property of a prescribed class.

The agreed amount is deemed by paragraph 85(1)(c.1) to be $120, the lesser of the fair market value of the property and its cost amount to the transferor at the time of disposition. The transferor is thereby prevented from creating a loss on the disposition. The term “cost amount” of capital property or inventory, as discussed in this example, is defined in subsection 248(1) as being respectively the adjusted cost base or its value at the time of disposition as determined for the purpose of computing the transferor's income.

However, in this example if the non-share consideration received for the property is instead $150, this latter amount is deemed by paragraphs 85(1)(b) and (e.3) to be the agreed amount. Paragraph 85(1)(c) has no application because the amount deemed by paragraph 85(1)(e.3) to be the agreed amount is not greater than the fair market value of the property at the time of disposition.

Example of the application of paragraph 85(1)(d)

¶ 13. This example demonstrates the tax effect where:

(a) the original agreed amount

is less than the least of

(b) the fair market value of the property,

(c) its cost, and

(d) 4/3 of the cumulative eligible capital of the relevant business.

Assumptions

The taxpayer has only one business.

The property is eligible capital property.

The agreed amount is deemed by paragraph 85(1)(d) to be $160, that is, the least of 4/3 of the cumulative eligible capital, the cost of the property and the fair market value of the property at the time of disposition. There is therefore no amount deductible pursuant to paragraph 24(1)(a) because three-quarters of the deemed proceeds of disposition of $160 equals the balance of the cumulative eligible capital immediately before the disposition. See also ¶ 24.

Example of the application of paragraph 85(1)(e)

¶ 14. This example demonstrates the tax effect where:

(a) the original agreed amount

is less than the least of

(b) the fair market value of the property,

(c) its cost, and

(d) the undepreciated capital cost (UCC) of all the property of the relevant class.

Assumptions

The property is the remaining depreciable property of a prescribed class.

The transaction is not subject to subsection 13(21.2) (see ¶ 23).

The agreed amount is deemed by paragraph 85(1)(e) to be $65. A terminal loss of $40 otherwise arising is reduced to $15, an amount that reflects the actual decline in the value of the property. The $25 difference is the excess of the fair market value of the property ($65) over the amount originally agreed upon by the taxpayer and the corporation ($40).

Transfers of Depreciable and Eligible Capital Property

¶ 15. Where more than one depreciable property of a prescribed class, or more than one eligible capital property are transferred simultaneously to a corporation under subsection 85(1), paragraph 85(1)(e.1) provides that each such property is transferred separately, in the order designated by the taxpayer. If the taxpayer does not designate any such order, the Minister will designate the order. The purpose of paragraph 85(1)(e.1), in providing that each property is transferred separately in a designated order, is to allow a reduction in the UCC of the class, or the cumulative eligible capital, as each property is transferred. Where property is being transferred to only one transferee, the order in which properties are transferred will only become significant where consideration other than shares is received on the transfer, e.g., where cash and shares are included in the consideration.

The following is an example of the application of paragraph 85(1)(e.1) to the transfer of two depreciable properties of the same prescribed class:

Assumptions

The taxpayer stipulates that the properties are to be transferred at the minimum allowable amounts and designates the order to be Property A followed by Property B. To achieve the best result, the taxpayer should elect $80 for Property A which, when deducted from the UCC of the class, leaves a balance of $220. Property B would then be transferred at an agreed amount of $220 and no recapture of capital cost allowance results. If the order of transfer was Property B followed by Property A, Property B would have to be transferred at an amount of $300 and the UCC of the class would be reduced to nil. Property A cannot be transferred at an agreed amount of nil because of the non-share consideration of $80 received for it. Property A must therefore be transferred at an amount of $80 pursuant to paragraphs 85(1)(b) and 85(1)(e.3) and recapture of capital cost allowance of $80 results.

¶ 16. Subsection 85(1) may be used to have a corporation, which is owned by two or more taxable Canadian corporations, transfer eligible property or an undivided interest in such property to these shareholder corporations on a tax-deferred basis provided that the conditions described in subsection 85(1) are met (see ¶s 1, 3 and 4) and provided that the transaction is not one to which subsection 13(21.2) is applicable (see ¶ 23). An example of the application of subsection 85(1) to such a transaction follows:

Assumptions

A Co and B Co have owned the shares of C Co in the ratio of 60:40 for a number of years. C Co's sole assets are land having a cost of $1,000 and a fair market value of $2,000 and two buildings, one having a cost of $6,000 and a fair market value of $12,000 (Building A) and the other having a cost of $4,000 and a fair market value of $8,000 (Building B). Both buildings are included in Class 3 for purposes of capital cost allowance. The UCC of the Class 3 property is $5,000. The corporations are incorporated in a jurisdiction that does not prohibit a corporation from owning shares of its parent corporation.

The land and buildings, which are eligible property, are to be transferred on a tax deferred basis in such a manner that each of A Co and B Co will have a 60% and 40% undivided interest in the land, respectively. In addition, A Co will receive Building A and B Co will receive Building B. A Co will give consideration to C Co consisting of preferred shares having a fair market value of $13,200. B Co will give consideration to C Co consisting of preferred shares having a fair market value of $8,800. For the purposes of subsection 85(1), elections may be made by C Co and A Co at an agreed amount of $600 for the undivided interest in the land and at $3,000 for the building. Similarly, C Co and B Co may elect at an agreed amount of $400 for the land and $2,000 for the building. If the lower limits set out in paragraph 85(1)(e) (see ¶ 10) were followed for the transfers of the depreciable property as described in this example, the UCC of the class would not be allocated proportionally between the transferees. All or most of it would be allocated to the transfer that occurs first or is designated to occur first (see ¶ 15). The CCRA has, however, adopted a practice for divisive reorganizations described in paragraph 55(3)(a) or (b) of the Act to interpret the reference to “the undepreciated capital cost to the taxpayer of all property of that class immediately before the disposition” found in subparagraph 85(1)(e)(i) to mean that proportion of the UCC of the class that the capital cost (or fair market value) of the asset immediately before the disposition is of the capital cost (or fair market value) of all property of that class immediately before the disposition. A similar administrative concession has been adopted for transfers of eligible capital property under subparagraph 85(1)(d)(i).

Excess Liabilities

¶ 17. The CCRA has reconsidered its position that paragraph 85(1)(b) would not apply to a transfer of property having liabilities in excess of its cost amount where the excess liabilities were allocated to other property transferred or were assumed by the transferee in consideration for the delivery of a promissory note in the amount of the excess. For transfers of property occurring after 2000, it is the CCRA's position that where a property (the “First Property”) is transferred to a corporation under section 85 and:

(a) the corporation assumes an obligation of the transferor as consideration for the acquisition from the transferor of a second property (for example a promissory note of the transferor) and the corporation subsequently disposes of that property to the transferor;

(b) the corporation assumes an obligation of the transferor as consideration for the redemption or acquisition by the corporation of its shares held by the transferor; or

(c) where the transferor is a corporation, the transferee corporation subscribes for shares of the transferor,

the obligation assumed or the property contributed will be regarded as non-share consideration received for the First Property for the purposes of paragraph 85(1)(b). Thus, if the total non-share consideration received by the transferor for the First Property exceeds the amount agreed upon by the parties in their election under subsection 85(1), paragraph 85(1)(b) will apply to increase the agreed amount.

Consider the following example, Sellco owns a capital property having a cost amount of $200, a fair market value of $1000 and an outstanding mortgage on the property of $700. Sellco transfers the $1000 property to Buyco, a related corporation, under subsection 85(1) and also issues to Buyco a promissory note for $500. The agreement between Sellco and Buyco provides that, as consideration for the capital property, Buyco will assume $200 of the mortgage liability and will issue to Sellco $500 worth of redeemable preferred shares and $300 worth of common shares and that, as consideration for the promissory note issued by Sellco, Buyco will assume $500 of the mortgage liability of Sellco. At some time after the transfer, Buyco redeems the preference shares by surrendering the promissory note to Sellco. In the CCRA's view the full amount of the mortgage is assumed as consideration for the transferred property. Sellco has received $700 of non-share consideration for the transfer and, by virtue of paragraph 85(1)(b), this is the lowest amount that could be elected in respect of the transfer under subsection 85(1).

Paragraph 85(1)(b), however, will not apply where the fair market value of the non-share consideration given (including the assumption of debt by the transferee) is allocated among several properties transferred and retained by the transferee and the amount allocated to each asset is not greater than the agreed amount in respect of each asset.

Benefits Conferred on a Related Person

¶ 18. Where a taxpayer transfers property to a corporation under subsection 85(1) and the fair market value of the property that is transferred to the corporation exceeds the greater of:

(a) the fair market value of all consideration (including shares of the corporation) received by the taxpayer and

(b) the amount agreed upon by the taxpayer and the corporation

and it is reasonable to regard any part of the excess as a benefit that the taxpayer desired to confer on a person related to the taxpayer, the provisions of paragraph 85(1)(e.2) will operate to increase the amount otherwise agreed upon by the amount of the benefit.

Paragraph 85(1)(e.2) does not apply where the transferee is a wholly owned corporation of the taxpayer. A“wholly owned corporation” is defined in subsection 85(1.3) to mean a corporation all of the issued and outstanding shares of which (other than director's qualifying shares) belong to:

(c) the taxpayer,

(d) a corporation that is a wholly owned corporation of the taxpayer, or

(e) any combination of persons described in (c) or (d).

The definition of “wholly owned corporation” would include second and lower-tiered wholly owned subsidiaries. For example, where A Co owns all of the issued and outstanding shares of B Co which in turn owns all of the issued and outstanding shares of C Co which owns all of the issued and outstanding shares of D Co, D Co would qualify as a wholly owned corporation of A Co for the purposes of paragraph 85(1)(e.2).

Passenger Vehicles

¶ 19. Paragraph 85(1)(e.4) provides that where, in a non-arm's length transaction, the transferor disposes of a passenger vehicle (as defined in subsection 248(1)) which had an actual cost to the transferor of more than the amount prescribed in subsection 7307(1) of the Regulations, the agreed amount shall be deemed to be equal to the UCC of the vehicle to the transferor immediately before the disposition. However, for the purposes of determining a reasonable standby charge under subsection 6(2), the cost to the corporation of the vehicle is considered to be an amount equal to its fair market value immediately before the transfer. This rule supersedes the more general rule in paragraph 85(1)(e) for depreciable property of a prescribed class (see ¶ 10 and 14). The current version of IT-419, Meaning of Arm's Length, contains comments on whether a taxpayer is dealing at arm's length with a corporation.

Subsection 7307(1) of the Regulations prescribes the following amounts:

(a) for an automobile acquired after August 1989 and before 1991, $24,000, and

(b) for an automobile acquired

(i) after 1990 and before 1997, $24,000,

(ii) in 1997, $25,000,

(iii) in 1998 or 1999, $26,000,

(iv) in 2000, $27,000, and

(v) after 2000, $30,000,

plus the Goods and Services Tax and any provincial sales tax that would be payable if the automobile had been acquired for such amount noted in (i) to (v) above.

Shares of the Transferor

¶ 20. In certain circumstances it may be desirable to transfer shares of a corporation to the corporation under subsection 85(1). For example, this technique may be used to crystallize a capital gains exemption without having to incorporate a new corporation. While this technique can be effective to achieve the desired tax consequences, certain precautions must be observed. For example, the aggregate amount of any non-share consideration received for the shares plus the paid-up capital of the new shares received as consideration on the transfer cannot exceed the paid-up capital of the old shares which are the subject of the transfer or a deemed dividend under subsection 84(3) and/or 84(1) ¹ will arise. This is so because the acquisition of the share by the corporation is an acquisition of its shares for the purposes of subsection 84(3) and the amount paid will, by virtue of subsection 84(5), include the amount by which the paid-up capital of the class of new shares has increased by virtue of their issue. In addition, a dividend may arise under subsection 84(3) where the legal paid-up capital of the new shares exceeds the paid-up capital of the old shares (see ¶ 29).

Cost to Transferor of Consideration Received from the Corporation

¶ 21. Paragraphs 85(1)(f), (g) and (h) apply for the purposes of determining the cost of any property received as consideration by the transferor. The aggregate cost of the consideration will be equal to the agreed amount as determined by subsection 85(1) (but not including any amount arising as a result of the application of paragraph 85(1)(e.2)). Paragraphs 85(1)(f), (g) and (h) allocate the cost as follows (assuming that only one type of non-share consideration, and one class of either preferred or common shares, or one class of both, are received):

(a) non-share consideration—the cost is deemed to be the lesser of the fair market value of the non-share consideration received and the fair market value of the transferred property,

(b) preferred shares—the cost is deemed to be the lesser of the excess of the agreed amount over the fair market value of non-share consideration and the fair market value of all preferred shares receivable by the transferor as consideration for the disposition, and

(c) common shares—the cost is deemed to be the balance of the agreed amount after deducting the portions attributed to the non-share consideration and the preferred shares.

Where more than one type of non-share consideration, or more than one class of either preferred or common shares, or both, are received as consideration for the transfer, paragraphs 85(1)(f), (g) and (h) will allocate the aggregate cost of the non-share consideration, the preferred shares or the common shares as determined under (a), (b) or (c) above to such property based on the proportion that the fair market value of each particular property is of the aggregate fair market value of that type of consideration received.

Loss From Disposition of Property

¶ 22. Various stop-loss rules may apply where a taxpayer transfers a property with an accrued loss to a person who is an affiliated person of the taxpayer. Subsection 251.1(1) contains the rules to determine when persons are affiliated with each other. Subsection 251.1(1) provides, amongst other things, that “affiliated persons”, or persons affiliated with each other, include

(a) a corporation and

(i) a person who controls the corporation,

(ii) each member of an affiliated group that controls the corporation, and

(iii) a spouse or common-law partner of a person described in subparagraph (i) or (ii);

(b) two corporations, if

(i) each corporation is controlled by a person, and the person who controls one corporation is affiliated with the person who controls the other corporation,

(ii) one corporation is controlled by a person, the other corporation is controlled by a group of persons, and each member of that group is affiliated with that person, or

(iii) each corporation is controlled by a group of persons, and each member of each group is affiliated with at least one member of the other group; and

(c) a corporation and a partnership, if the corporation is controlled by a particular group of persons each member of which is affiliated with at least one member of a majority-interest group of partners of the partnership, and each member of that majority-interest group is affiliated with at least one member of the particular group.

Control for the purposes of determining whether persons are affiliated persons means “controlled directly or indirectly in any manner whatever” which, pursuant to subsection 256(5.1), expands the concept of control to include what is often considered to be de facto control. See the current version of IT-64, Corporations: Association and Control, for a discussion of subsection 256(5.1).

¶ 23. The provisions of subsection 13(21.2) will apply to the transfer of a loss property which is depreciable property of a prescribed class to a corporation which is an affiliated person (see ¶ 22) of the transferor when, on the 30th day after the transfer, an affiliated person of the transferor owns or has the right to acquire the transferred property. Where the provisions of subsection 13(21.2) are applicable, subsection 85(1) is not applicable and the proceeds of disposition are basically deemed to be such that the transferor is denied any terminal loss that might otherwise arise. In such a case, the terminal loss will be suspended and will not be available to the transferor until the time that is immediately before the earliest of the events listed in clauses 13(21.2)(e)(iii)(A) to (E). In the meantime, the transferor is deemed to own a depreciable property having a capital cost equal to the amount of the denied loss and will be entitled to claim capital cost allowance thereon.

¶ 24. The provisions of subsection 14(12) may apply to restrict the deduction under paragraph 24(1)(a) on the disposition of eligible capital property to a corporation that is an affiliated person of the transferor. Subsection 14(12) applies where, during the period that begins 30 days before and ends 30 days after the disposition, the transferor or a person affiliated with the transferor acquires the particular property or property that is identical to the particular property and, at the end of the period, the transferor or a person affiliated with the transferor owns the property or substituted property. In such a case, the deduction under paragraph 24(1)(a) will be suspended and will not be available to the transferor until the time that is immediately before the earliest of the events listed in paragraphs 14(12)(c) to (g). In the meantime, the transferor is deemed to own eligible capital property in respect of a business and will be entitled to claim a deduction under paragraph 20(1)(b) for such property.

¶ 25. Subparagraph 40(2)(g)(i) or subsection 40(3.4) may apply where a loss property which is a capital property is transferred to a corporation which is an affiliated person of the transferor. The stop-loss rules will generally apply where, during the period that begins 30 days before and ends 30 days after the disposition, the transferor or a person affiliated with the transferor acquires the particular property or property that is identical to the particular property, and at the end of the period, the transferor or a person affiliated with the transferor owns the property or substituted property. Where either of these provisions applies it deems any capital loss arising on the disposition to be nil. Where the transferor is an individual (other than a trust), the capital loss will be a “superficial loss” within the meaning of section 54 and subparagraph 40(2)(g)(i) will apply to deny the loss. By virtue of paragraph 53(1)(f) the amount of the denied capital loss of the individual will be added to the adjusted cost base of the capital property owned by the corporation. Where the transferor is a corporation, trust or partnership, it is the rule in subsection 40(3.4) which will apply to deny the loss. In such a case, the capital loss will be suspended and will not be available to the transferor until the time that is immediately before the earliest of the events listed in subparagraphs 40(3.4)(b)(i) to (v).

Rollovers of Capital Property

¶ 26. In circumstances where a corporation has acquired, on a rollover basis under subsection 85(1), property that was non-depreciable capital property of a controlling shareholder or of an affiliated corporation, the CCRA will generally accept that the nature of the property has not changed solely because the corporation resold the property within a relatively short period of time following the rollover.

Taxable Canadian Property

¶ 27. Where a taxpayer transfers taxable Canadian property to a corporation under subsection 85(1), all the shares of the corporation received by the taxpayer as consideration for the transfer are deemed to be taxable Canadian property pursuant to paragraph 85(1)(i).

Contribution of Capital

¶ 28. Where subsection 85(1) applies to a transfer of property which results in a contribution of capital to the transferee corporation, no adjustment to the adjusted cost base of any shares of that corporation is permitted under paragraph 53(1)(c). For example, where eligible property that has a fair market value equal to $100 is transferred at an agreed amount of $100 in exchange for one preferred share with a paid-up capital and a redemption amount of $10, the $90 difference is not a contribution of capital that can be added to the adjusted cost base of the preferred share.

Reduction of Paid-up Capital

¶ 29. Subsection 85(2.1) is an anti-avoidance rule that is intended to prevent the removal of taxable corporate surpluses as a tax-free return of capital in circumstances where sections 84.1 and 212.1 do not apply. (See the current version of IT-489, Non-Arm's Length Sale of Shares to a Corporation, for a discussion of sections 84.1 and 212.1.) Subsection 85(2.1) applies where property is transferred to a corporation pursuant to subsection 85(1) or (2) and the increase in the paid-up capital of the issued shares of the corporation as a result of the transfer (generally an amount equal to the paid-up capital of the share consideration) exceeds the cost to the corporation of the property less the fair market value of any non-share consideration. In any such case, paragraph 85(2.1)(a) requires the paid-up capital of the shares of the corporation to be reduced by the amount of the excess. The paid-up capital reduction is allocated among the classes of shares of the corporation based upon the increase to their respective stated capitals under the relevant corporate law as a result of the transfer.

An example of the application of paragraph 85(2.1)(a) is as follows:

Assumptions

The property is other than shares described in section 84.1 or 212.1.

Pursuant to paragraph 85(2.1)(a) the decrease in the paid-up capital arising from the transaction is $25 being the amount by which the increase in the stated capital exceeds the excess of the agreed amount over the fair market value of the non-share consideration received.

The formula in subsection 85(2.1) may yield anomalous results where the property transferred is shares of the corporation itself as described in 20 above. Consider the following situation:

X, an individual, owns 5% of the issued common shares of Opco having a cost amount and paid-up capital of $100,000 and a fair market value of $600,000. In order to realize a capital gain and make use of the deduction available under subsection 110.6(2.1), X transfers the common shares of Opco to Opco in return for preferred shares of Opco having a fair market value of $600,000. X and Opco elect under subsection 85(1) to transfer the shares at an agreed amount of $600,000. Since X deals at arm's length with Opco, the corporate law of most jurisdictions will require Opco to add to the stated capital of the preferred shares issued to X an amount equal to the fair market value of the consideration received for their issue, i.e. $600,000 being the fair market value of X's common shares of Opco. Since the increase in the paid-up capital of the issued shares of Opco as a result of the transfer does not exceed the cost to Opco of the common shares less the fair market value of any non-share consideration, subsection 85(2.1) will not apply to reduce the paid-up capital of the preferred shares issued to X. Consequently, as noted in ¶ 20, by virtue of subsection 84(1) ¹ , X will be deemed to have received a dividend of $500,000.

Deemed Capital Cost Allowance

¶ 30. Where the rules in subsection 85(1) or (2) have applied to a disposition of depreciable property and the capital cost to the transferor exceeds the transferor's proceeds of disposition, subsection 85(5) applies for the purposes of sections 13 and 20 and any regulations made under paragraph 20(1)(a) to deem

(a) that the capital cost of the property to the transferee is the amount that was the capital cost to the transferor, and

(b) that the excess has previously been allowed to the transferee as capital cost allowance.

The purpose of this rule is to ensure that the transferee will be liable for any recapture of capital cost allowance that might arise on a subsequent disposition of the property.

Where paragraph 13(7)(e) has applied to reduce the capital cost of a depreciable property acquired by a taxpayer in a non-arm's length transaction and this depreciable property is subsequently transferred to a corporation under subsection 85(1), it is the CCRA's view that it is the capital cost of the depreciable property to the transferor as determined under paragraph 13(7)(e) that will be relevant for the purpose of determining the corporation's capital cost under subsection 85(5).

¶ 31. New subsection 85(5.1) provides a similar rule where an apprentice mechanic has, after 2001, transferred tools in respect of which a deduction has been claimed under paragraph 8(1)(r) to a corporation under subsection 85(1). Where such tools are depreciable property of the corporation and the cost of the property to the transferor has been reduced under subsection 8(7), subsection 85(5.1) will apply to deem the capital cost of the tools to the corporation to be an amount equal to the original cost of the tools to the transferor. The amount by which the cost of the tools has been reduced under subsection 8(7) is considered to have been previously claimed by the corporation as capital cost allowance. Therefore, the corporation may be subject to recapture for this amount on a subsequent disposition of the tools.

Subsequent Dispositions of Eligible Capital Property

¶ 32. Paragraph 85(1)(d.1) applies where a taxpayer has disposed of eligible capital property to a corporation and the corporation subsequently disposes of the eligible capital property. The paragraph applies to adjust the amount to be included in computing the corporation's income under paragraph 14(1)(b) to account for the change in the rate of income inclusion and expenditure deduction from ½ to ¾. It does this by adding an amount to that otherwise determined for Q in the definition “cumulative eligible capital” in subsection 14(5). The variable Q generally represents the difference between deductions claimed for eligible capital property under paragraph 20(1)(b) and gains from prior dispositions of eligible capital property by the taxpayer for the period before the taxpayer's adjustment time (i.e. the time where the inclusion rate for eligible capital property increased from ½ to ¾). For non-corporate taxpayers the adjustment time is immediately after the start of the taxpayer's fiscal period commencing after 1987. For most corporations the adjustment time is immediately after the start of its first taxation year commencing after June 30, 1988. The amount to be added to variable Q under paragraph 85(1)(d.1) is determined by the formula

A × B÷C – 2×(D – E)

where

A is the amount, if any, determined for Q in the definition “cumulative eligible capital” in subsection 14(5) for the taxpayer's business immediately before the time of the disposition,

B is the fair market value immediately before the time of disposition of the eligible capital property disposed of to the corporation by the taxpayer,

C is the fair market value immediately before the time of disposition of all eligible capital property of the taxpayer for the business,

D is the amount, if any, that would be included under subsection 14(1) in computing the taxpayer's income as a result of the disposition if the values determined for C and D in paragraph 14(1)(b) were zero, and

E is the amount, if any, that would be included under subsection 14(1) in computing the taxpayer's income as a result of the disposition if the value determined for D in paragraph 14(1)(b) were zero.

Note 2: On December 20, 2002, the Minister of Finance released Legislative Proposals and Explanatory Notes Relating to Income Tax, a package of draft technical amendments to the Income Tax Act. One of the proposals is to amend paragraph 85(1)(d.1) and to add new paragraphs 85(1)(d.11) and (d.12) to revise the manner in which the adjustment under paragraph 85(1)(d.1) is determined. If enacted as proposed, these amendments will apply to dispositions after December 20, 2002.

Anti-Avoidance Rules

¶ 33. Subsection 69(11) is an anti-avoidance provision that may apply, in certain circumstances, to deny a tax-deferred transfer under subsection 85(1). Where it applies, the transferor will be deemed to have disposed of the property for proceeds equal to its fair market value at that time. Subsection 69(11) will apply where as part of a series of transactions a taxpayer disposes of property on a tax-deferred basis and it may reasonably be considered that one of the main purposes of the series is to obtain the benefit of a tax deduction or other entitlement (including tax exempt status) which is available to a person who is not affiliated with the taxpayer (see ¶ 22) in respect of a subsequent disposition of the property. For purposes of subsection 69(11), the affiliated person rules are to be read without the extended definition of control found in subsection 256(5.1). In other words, only de jure control is considered.

¶ 34. The current version of Information Circular 88-2, General Anti-Avoidance Rule, and Supplement 1 thereto also discuss a number of examples that illustrate the use of subsection 85(1) and comments on the application of subsection 245(2) thereto. These examples include Divisive Reorganizations (Butterflies), Consolidation of Profits and Losses in a Corporate Group, Estate Freezes, Incorporation of a Proprietorship, Part IV Tax on Taxable Dividends Received, Transfer of Land Inventory, Crystallizing Capital Gains Deduction and Increase of Cost of Property Acquired on a Winding-Up of a Corporation.

Administrative Matters

¶ 35. One of the requirements that must be met for section 85 to apply to a transfer of property to a corporation is that the transferor receives consideration that includes at least one share of the capital stock of the corporation. It is the practice of the CCRA to accept an election under subsection 85(1) where the shares to be issued as consideration for the transferred property have not been legally authorized under the articles of the corporation at the time of the transfer provided that all of the following conditions are satisfied:

(a) there is an agreement between the transferor and the transferee which requires, among other things, that the transferee issue the required shares;

(b) the transferee immediately carries out the necessary steps to authorize the issuance of the shares, that is it files supplementary letters patent or articles of amendment, as the case may be;

(c) once the necessary amendments to the corporation's constituting documents are made, the transferee corporation issues the shares without delay.

If for any reason the transferee corporation does not obtain, under the applicable corporate legislation, the necessary authorization for the issuance of the shares, the election under subsection 85(1) will be considered to be invalid.

¶ 36. Occasionally, following a transfer of property under subsection 85(1), the corporate transferor or the transferee may be amalgamated with another corporation or liquidated. Where the corporation has been amalgamated and the relevant corporate legislation provides that the amalgamated corporation is a continuation of its predecessors, a valid subsection 85(1) election may be filed by the amalgamated corporation on behalf of its predecessors. However, where the corporation has been liquidated, the corporation has no legal existence following its dissolution. Consequently, any elections must be filed before the corporation is formally dissolved.

¶ 37. See the current version of Information Circular 76-19, Transfer of Property to a Corporation under Section 85, for information and guidance in making a valid election.

Explanation of Changes

Introduction

The purpose of the Explanation of Changes is to give the reasons for the revisions to an interpretation bulletin. It outlines revisions that we have made as a result of changes to the law, as well as changes reflecting new or revised interpretations of the CCRA.

Reasons for the Revision

We have revised this bulletin primarily to reflect amendments to section 85 of the Act resulting from S.C. 1994, c. 8, S.C. 1994, c. 21, S.C. 1995, c. 3, S.C. 1995, c. 21, S.C. 1997, c. 25, S.C. 1998, c. 19, S.C. 2001, c. 17 and S.C. 2002, c. 9.

Legislative and Other Changes

The Summary has been revised to eliminate the statement that “eligible property” includes capital property only if owned by a resident of Canada.

¶ 1 has been revised to include the requirement of subsection 85(1) that the transferee be a taxable Canadian corporation. It also reflects the repeal of subsection 85(5.1) relating to the transfer of a loss property and its replacement by subsection 13(21.2) as enacted by S.C. 1998, c.19 and to clarify that the requirement that subsection 13(21.2) not apply is only relevant where the property transferred is depreciable property of a prescribed class.

¶ 4 describes “eligible property” as defined in subsection 85(1.1) and has been revised to reflect legislative amendments to paragraphs 85(1.1)(b), (g) and (g.1). It has also been revised to clarify that accounts receivable of a cash basis business are not eligible property, to include a reference to the current version of IT-176 and IT-403 and to describe the October 11, 2002, Notice of Ways and Means Motion to Amend the Income Tax Act, which proposes to add new subparagraph 85(1)(g)(ii.1) to exclude from eligible property, for the purposes of subsection 85(1), property to which the proposed mark-to-market taxation regime for participating interests in foreign investment entities under proposed subsection 94.2(4) applies. This proposal, if enacted, will be effective for taxation years that begin after 2002.

¶ 5 has been revised to eliminate out-dated information that is no longer relevant and to include a reference to the current versions of IT-427 and IT-433.

New ¶ 7 has been added to explain the anti-avoidance rule found in subsection 85(1.11) which was enacted by S.C. 2001, c. 17.

¶ 8 (formerly ¶7) has been revised to clarify the circumstances where a section 22 election may be made for the sale of accounts receivable as part of the sale of a business to a corporation.

¶ 9 (formerly ¶8) has been revised to delete the reference that the comments therein apply to dispositions occurring after 1989 and to improve clarity.

¶ 10 (formerly ¶9) has been revised to delete the reference to subsection 69(11). Expanded comments relating to subsection 69(11) can now be found in new ¶ 33. This paragraph has also been revised to improve clarity, to reflect legislative amendments to the types of property that can be transferred under paragraph 85(1)(c.1) as described in ¶ 4 above, to eliminate information that is no longer relevant and to reflect the repeal of subsections 85(4) and 85(5.1) and their replacement by subparagraph 40(2)(g)(i) and subsections 40(3.4) and 13(21.2).

Former ¶s 10, 11, 12, 13 and 14 have been renumbered as ¶s 11, 12, 13, 14 and 15. Cross-referencing has been revised to reflect this renumbering. In addition, the reference in ¶ 11 to subsection 84(1) has been changed to section 84 to be consistent with the legislation, ¶ 12 has been revised to include the changes to the example that were previously in ¶ 19, while ¶ 14 has been revised to reflect the repeal of subsection 85(5.1) and its replacement by subsection 13(21.2) as enacted by S.C. 1998, c.19.

¶ 16 (formerly ¶15) has been revised to explain an administrative position that is available for the transfer of depreciable property or eligible capital property in certain divisive reorganizations. It has also been revised to reflect the repeal of subsection 85(5.1) and its replacement by subsection 13(21.2) as enacted by S.C. 1998, c.19.

¶17 is a new paragraph that describes the CCRA's revised position on non-share consideration received for the purposes of paragraph 85(1)(b). This revised position applies for transfers after 2000 and is based in part on the decisions of the courts in Haro Pacific Enterprises Ltd. v. The Queen (90 DTC 6583; [1990] 2 CTC 493) and MDS Health Group Limited v. The Queen (97 DTC 5009; [1997] 1 CTC 111).

¶ 18 (formerly 16) has been revised to consolidate the comments that were formerly in ¶s 16, 17 and 18. It has also been revised to include an explanation of the expression “wholly owned corporation” as found in subsection 85(1.3).

Former ¶ 19 has been deleted as the effect of paragraph 85(1)(e.3) has been discussed in ¶ 10.

¶ 19 (formerly ¶ 20) has been revised to describe the amounts prescribed under subsection 7307(1) of the Regulations for certain passenger vehicles.

¶ 20 is a new paragraph that discusses the transfer of shares of a corporation to itself under subsection 85(1).

¶ 21 has been revised to expand on the manner of determining the cost of the consideration received as determined under paragraphs 85(1)(f), (g) and (h).

¶ 22 is a new paragraph that discusses the concept of “affiliated person” as defined in subsection 251.1(1). The concept of “affiliated person” is relevant to the various stop-loss rules which apply following the amendments enacted by S.C. 1998, c. 19.

¶ 23 (formerly ¶ 22) is revised as a result of the repeal of subsection 85(5.1) and its replacement by new subsection 13(21.2). New subsection 13(21.2), which was enacted by S.C. 1998, c. 19, will, in certain circumstances, deny a rollover under subsection 85(1) and deny a terminal loss to the transferor on the transfer of depreciable property to a corporation that is an affiliated person of the transferor.

¶ 24 is a new paragraph that describes the stop-loss rule applicable to the disposition of eligible capital property to a corporation that is an affiliated person of the transferor. This stop-loss rule is found in new subsection 14(12) which was enacted by S.C. 1998, c. 19.

¶ 25 (formerly ¶ 23) has been revised to reflect the repeal of subsection 85(4) and its replacement by the superficial loss rules and new subsection 40(3.4) as enacted by S.C. 1998, c. 19. Where these rules apply, they deny an immediate capital loss on the transfer of capital property to a corporation that is an affiliated person of the transferor.

Former ¶ 24 has been deleted and comments on the definition of “controlled, directly or indirectly in any manner whatever” have been included in new ¶ 21.

¶ 26 is a new paragraph which reflects the CCRA's position as stated on page 6 of Income Tax Technical News No. 7.

Former ¶s 25 and 26 have been renumbered as ¶s 27 and 28.

¶ 29 (former ¶ 27) has been revised to reflect an example of where subsection 85(2.1) will not decrease the paid-up capital with the result that a dividend under subsection 84(1) ¹ will arise.

¶ 30 (formerly ¶ 28) has been revised to delete the reference to subsection 85(5.1) that was repealed by S.C. 1998, c. 19. It has also been revised to clarify that where paragraph 13(7)(e) has applied for the purposes of determining the transferor's capital cost of a depreciable property acquired in a non-arm's length transaction, it is this capital cost which will be relevant in the application of subsection 85(5) to the transferee corporation.

¶ 31 is a new paragraph which discusses new subsection 85(5.1) which is applicable where an apprentice mechanic has, after 2001, transferred tools to a corporation under subsection 85(1).

¶ 32 (former 29) has been revised to clarify the circumstances in which paragraph 85(1)(d.1) will apply and to reflect the descriptions of D and E in paragraph 85(1)(d.1) as amended by S.C. 2001, c. 17. Paragraph 85(1)(d.1) is intended to prevent an overstatement of the amount to be included by virtue of paragraph 14(1)(b) in computing the income of the corporation in a taxation year as a result of a disposition by the corporation of eligible capital property subsequent to the transfer. A note has also been included concerning the proposed technical amendments which were released on December 20, 2002, as Legislative Proposals and Explanatory Notes Relating to Income Tax.

¶ 33 is a new paragraph that adds some remarks concerning the anti-avoidance rule in subsection 69(11)

¶ 34 (formerly ¶ 30) has been revised to include a reference to relevant examples described in Supplement 1 to Information Circular 88-2.

¶ 35 is a new paragraph that has been added to describe the CCRA's practice where the shares to be issued as consideration for the transfer have not been authorized at the time of the transfer. This practice is currently described on page 4 of Income Tax Technical News No. 3.

¶ 36 is a new paragraph that has been added to describe the CCRA's views on the filing of elections where a party to the rollover has undergone an amalgamation or has been liquidated.

¶ 37 (formerly ¶ 31) has been renumbered.

Former ¶ 32 has been deleted as the comments were outside the scope of the bulletin.

Throughout the bulletin we have revised some of the wording in order to improve readability without altering the substance.

¹ Corrected on March 18, 2005.