Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues: Whether there is a benefit conferred when a corporation's first share is issued for a nominal price after the corporation has carried on business and has accumulated value.
Position: Yes.
Reasons: The law. The value of a share is significantly derived from the value of the net assets of the corporation. Subject to an appropriate rectification order of a Court, the payment of a nominal amount for a share that has, at the time of payment, more than nominal value results in a benefit being conferred on the person purchasing the share.
XXXXXXXXXX 2002-014396
January 3, 2003
Dear XXXXXXXXXX:
Re: Issuance of Shares -- Benefits
We are writing in reply to your facsimile inquiry of May 31, 2002 wherein you requested our opinion regarding the issuance of the first share of a corporation after the corporation had been carrying on business for a significant time and had accumulated significant value.
More specifically, you have asked that we consider the following situation:
(a) For 16 years the corporation carried on business without having issued any shares.
(b) Throughout the 16 years the corporation did not use the services of an accountant but, nevertheless, prepared and filed corporate tax returns and paid the applicable income tax.
(c) Presently, the retained earnings of the corporation have a book value of $100,000 and the fair market value of the corporation's property is $150,000.
(d) The taxpayer has never transferred property to the corporation.
(e) The corporation has never paid dividends.
As well, we have assumed that the first shareholder will acquire the share from the corporation for a nominal price and the increase to the paid up capital of the corporation as a result of the issue of the share to the first shareholder will be a nominal amount.
Your request appears to relate to a proposed transaction or a completed transaction. Confirmation of the income tax consequences of proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. To make such a request the advance income tax ruling must be submitted in accordance with the guidelines set out in Information Circular 70-6R5 ("IC-70-6R5") dated May 17, 2002. However, if the situation relates to a completed transaction a request for the Canada Customs and Revenue Agency's views must be made to your local Tax Services Office. We can, however, provide the following general comments.
Subject to an appropriate rectification order of a Court being obtained (for examples of the effects of a rectification order see AG (Can) v. Juliar et. al., 2000 DTC 6589 (Ont CA) and Dale v. The Queen, 97 DTC 5252 (FCA)), it is our view that the issue of a share of a corporation for a nominal amount at a time when the fair market value of that share is greater than a nominal amount will generally be considered to have resulted in a benefit being conferred on the purchaser of the share, even if that purchaser is the first subscriber for and purchaser of a share in the corporation. The amount of any such benefit would be included in that purchaser's income pursuant to subsection 15(1) or 246(1) ITA and the amount so included will generally be added to the adjusted cost base of the share to that purchaser pursuant to subsection 52(1) ITA.
Our comments are provided in accordance with the practice outlined in paragraph 22 of IC-70-6R5.
Yours truly,
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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