2 December 2003 External T.I. 2003-0048585 - Cost of Property Acquired for Shares

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: Cost of property acquired by corporation in exchange for the issuance of corporation's treasury shares.

Position: Cost of the property should generally reflect the price agreed to between the parties. However, where no price is ascertainable, the amount added to the stated capital account maintained for the class or series of shares issued on the exchange is relevant to determining cost.

Reasons: Implication of the decision of the Federal Court of Appeal in Teleglobe Canada Inc. v. R..

Tax Executives Institute, Inc.

December 2, 2003 Liaison Meeting

Question 17 - Cost Basis of Property Acquired for Treasury Shares

The decision in Tuxedo Holding Co. Ltd.¹ suggests that the cost of property acquired in exchange for a corporation's own shares is equal to the amount added to the stated capital of the shares for corporate law purposes. The recent decision of the Federal Court of Appeal in Teleglobe Canada Inc. v. The Queen,² however, has created uncertainty about this proposition. In Teleglobe, the court said that "the agreement of the parties determines the cost to the corporation of issuing shares in exchange for property." It also said that, "[w]hile one can say that the capital accounts are an indication of the agreement between the parties, it is the agreement of the parties, not the capital accounts which is determinative of the cost." These statements seem inconsistent and at odds with the Tuxedo Holding principle. Alternatively, the Teleglobe decision may stand for the proposition that either the agreement of the parties or the capital accounts can be the source for determining the cost amount of the acquired property.

We invite the CCRA's views on these issues. Specifically, does the CCRA maintain that the cost of acquiring an asset in exchange for an issuance of treasury shares is equal to the amount of stated capital added to that class of shares for corporate law purposes? Alternatively, does the CCRA maintain that the cost of such an asset is the amount stated in a purchase and sale agreement, notwithstanding the amount added to stated capital? Where neither of these alternatives produces a satisfactory result, would the CCRA permit a taxpayer to file a section 85 election late, in accordance with the provisions of subsection 85(7.1), in order to ensure that the deemed cost to the taxpayer of the property acquired is equal to the fair market value of the property at the time of acquisition?

CCRA Response

Where an asset is acquired by a corporation in exchange for shares of the corporation issued from treasury as a result of a transaction between the corporation and parties acting at arm's length with the corporation and the price of the asset is stated in the agreement governing the conveyance of the asset, it is our view that the cost of the asset will, subject to section 85, generally be equal to the price agreed to by the parties. Under most corporate statutes in Canada, the amount set out in the agreement will be the amount that is added to the stated capital account maintained for the class or series of shares so issued by the corporation. By determining cost solely with reference to the increase in the acquiring corporation's relevant stated capital account, it is possible, for example in those jurisdictions that permit the issue of par value shares, that the corporation will not have a cost in the asset that truly reflects the value of the consideration given by the corporation to acquire the asset. However, the amount added to the stated capital account of the class or series of shares issued in exchange for the asset may be relevant in determining the cost of the asset where the purchase and sale agreement does not specify a price for the asset.

Our position regarding the circumstances in which we will permit late or amended elections to be filed under section 85 is stated in Information Circular IC 76-19R3. In situations where an asset is transferred between parties acting at arm's length in exchange for treasury shares of the transferee and it can be demonstrated that the parties intended that the asset would be acquired by the transferee for consideration equal to the fair market value of the asset at the time of the transfer, we may allow for an election under section 85 to be filed late in order to rectify any unintended tax consequences. However, we will evaluate the merits of permitting late-filed elections in such circumstances on a case-by-case basis.

File 2003-004858
December 2003
J. MacGillivray

ENDNOTES

¹ 59 D.T.C. 1102 (Exch. Ct.).

² [2003] 1 C.T.C. 255.