12 February 1997 External T.I. 9631575 - INTERACTION OF SECTIONS 51 AND 116

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 section 116 of the act applies where non-resident is doing a share for share exchange in accordance with section 51 of the Act?

Position:

Yes.

Reasons:

Section 51 only deems there not to be a "disposition". It does not deem there not to be an 'acquisition".. Subsection 116(5) applies to those taxpayers acquiring taxable Canadian property.

	                                      963157
XXXXXXXXXX		                                Jim Wilson

Attention: XXXXXXXXXX

February 12, 1997

Dear Sirs:

Re: Subsection 51(1) and Section 116 of the Income Tax Act (the "Act")

This is in reply to your letter dated September 16, 1996 in which you requested our opinion regarding the interaction of the above-noted provisions of the Act. More specifically, you have described a situation where a non-resident of Canada exchanges his common shares (i.e. taxable Canadian property) of a corporation that is both a private corporation and a taxable Canadian corporation for preferred shares of that corporation under circumstances where subsection 51(1) of the Act will apply to the exchange. You wish to know whether the non-resident will be required to obtain a section 116 certificate from the Department.

We agree with you that paragraph 51(1)(c) of the Act applies for purposes of the entire Act (other than subsection 20(21)) and the exchange would be deemed not to be a disposition of the common shares. However, subsection 51(1) of the Act does not deem that there is no acquisition of the common shares acquired by the corporation for cancellation.

Subsection 116(5) of the Act applies where a purchaser (eg. the corporation) has acquired from a non-resident any taxable Canadian property (other than depreciable property or excluded property) under circumstances where the conditions described in paragraphs 116(5)(a) and (b) have not been met. The cost to the corporation of its common shares acquired for cancellation for purpose of paragraph 116(5)(c) of the Act would be that cost under common law principles. In this regard, the cost of a property acquired by a corporation issuing shares as consideration for the acquisition of the property is equal to the amount credited to the stated capital of such shares. This would appear to be consistent with the principle accepted by the courts in the decision of Tuxedo Holding Co. Ltd. v. M.N.R. 59 DTC 1102 (Ex. Ct.).

Regardless that, where subsection 51(1) of the Act applies, subsections 116(1) through (4) of the Act may not technically apply, the Department would adhere to any such request for a section 116 certificate. In this regard, for purposes of paragraph 116(2)(b) of the Act, where the Department is satisfied that no Canadian tax will be payable as a result of the proposed share for share exchange or any series of transactions or events that includes such exchange, the relevant tax services office, at its discretion, may accept nil or nominal security in order to issue a certificate.

The foregoing comments represent our general views with respect to the subject matter of your letter. As indicated in paragraph 22 of Information Circular 70-6R3, this is not an advance income tax ruling and is therefore not binding on Revenue Canada.

Yours truly,

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