31 May 2001 External T.I. 2001-0058925 - substituted property

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 Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Whether 69(11) would apply in a particular situation.

Position: No.

Reasons:

The property disposed by the non-affiliated person is not the transferred property or a property substituted for the property. Does not meet the definition of substituted property in subsection 248(5) of the Act.

		2000-005892
XXXXXXXXXX .	Karen Power, C.A.
(613) 957-8953
May 31, 2001

Dear Sirs:

Re: Subsection 69(11)

We are writing in reply to your letter of November 28, 2000 wherein you requested our opinion regarding the application of subsection 69(11) of the Income Tax Act (the "Act") to the various circumstances described therein.

Our Comments

The purpose of subsection 69(11) is to deny a tax deferred rollover to a taxpayer where the taxpayer, at any particular time as part of a series of transactions or events, disposes of property for proceeds of disposition that are less than its fair market value and one of the main purposes of the series can reasonably be considered to obtain the benefit of, inter alia, any deduction in computing taxable income available to a person who would not be affiliated with the taxpayer immediately before the series commenced, where the subsequent disposition of the property or property substituted for the property occurs, or arrangements for such disposition are made, within 3 years from the date of the first disposition.

Substituted property is defined in subsection 248(5) of the Act which states:

"For the purposes of this Act, other than paragraph 98(1)(a),

(a) where a person has disposed of or exchanged a particular property and acquired other property in substitution therefor and subsequently, by one or more further transactions, has effected one or more further substitutions, the property acquired by any such transaction shall be deemed to have been substituted for the particular property; ..."

Based on our understanding of the facts set out in your letter, we agree with your interpretation that the common shares of Newco held by Y in the situation you describe would likely not be considered substituted property as defined in subsection 248(5) of the Act, in respect of the property transferred by Mr. X to Newco.

It is a question of fact whether the provisions of subsection 245(2) of the Act would apply to a specific transaction or series of transactions. It is, however, our general view that subsection 245(2) will not apply to a transaction or series of transactions which is subject to the scrutiny of a specific anti-avoidance provision, such as subsection 69(11), unless such transaction or series of transactions has been structured to circumvent the provisions of the specific provision. Since we do not have sufficient information to determine whether the situations described in your letter are designed to circumvent a specific provision of the Act, such as subsection 69(11), we are unable to comment on the potential application of subsection 245(2) of the Act to those situations.

We trust our comments will be of assistance to you. However, as noted in Information Circular 70-6R4 issued on January 29, 2001, the above comments are not binding on the Canada Customs and Revenue Agency.

Yours truly,

for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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