At the end of our article on 729658 Alberta Ltd. v. The Queen, 2004 TCC 474, we speculated that the case might create new opportunities for taxpayers. A CRA technical interpretation dated February 5, 2005, suggests that the Agency disagrees.
The technical interpretation (CRA file number 2005-0112141E5) was published in French only, but CCH summarized it in Window on Canadian Tax at ¶8141. The technical interpretation considered a situation involving two brothers who each owned 50% of Opco, a CCPC. Each brother owned shares that had nominal cost, nominal paid-up capital, a value of $1 million and safe income of $700,000. One of the brothers, “A”, proposed to enter into the following transactions:
- A would incorporate Holdco.
- A would then transfer his shares of Opco to Holdco. A and Holdco would elect under section 85 so that A would realize a gain of $300,000. A would claim the capital gain exemption in respect of this gain.
- Opco would redeem the shares in its capital held by Holdco for $1 million.
What was the safe income of the Holdco’s shares in the capital of Opco immediately before the redemption? The CRA took the position that the safe income was about $489,000 because a portion of the unrealized capital gain on the Opco shares was realized upon their transfer to Holdco. According to the CRA, the situation described above should be distinguished from the one considered by Justice Woods in 729658 Alberta Ltd.. The CCH summary, however, does not provide any clues about how the CRA drew this distinction.
In fact, the situations seem quite similar, and the same policy grounds on which Justice Woods arrived at her decision would seem to recommend themselves in the circumstances considered by the technical interpretation. A might not pay any tax in respect of the transactions described above, if the reasoning in 729658 Alberta Ltd. were applied. A is fortunate in this regard, however, only because he can use the $500,000 exemption. His ability to claim the exemption, which is a preference granted for policy reasons that have nothing to do with safe income, does not change the fact that he received taxable income just like the taxpayers in 729658 Alberta Ltd..
The technical interpretation shows that the CRA, rather predictably, will likely attempt to limit the effect of 729658 Alberta Ltd. by confining it to its “special facts”. After all, the case called into question a well-established CRA position. Any taxpayer or adviser seeking to use the case for planning purposes will have to take this attitude into account.
