Subsection 69(1) - Inadequate considerations
Paragraph 69(1)(a)
Cases
La Survivance v. The Queen, 2007 DTC 5096, 2006 FCA 129
Before going on to find that it followed from the deeming in subsection 256(9) of control of a corporation to be acquired as of the beginning of the day that control also was relinquished by the previous controller at the same, Noël J.A. stated (at p. 5104) that the trial judge had:
"Rightly noted that the presumption in paragraph 69(1)(a) of the Act applies when determining the tax consequences for one of the parties to a transaction (the purchaser), without altering the tax liability of the other (the vendor). However, this asymmetry results from the clear language of paragraph 69(1)(a), which reduces the sale price of the purchaser by deeming it equal to the fair market value of the property sold, and clearly intentionally, lets the vendor suffer the tax consequences resulting from the higher amount actually received ... ."
Deptuck v. The Queen, 2003 DTC 5273, 2003 FCA 177
S.69(1)(a) applied to reduce the capital cost to a partnership of depreciable property purchased by it to the property's fair market value rather than the higher purchase price given that the same individual controlled both the vendor and the general partner of the partnership (as well as being the sole initial limited partner at the time of the purchase). Noël J.A. stated (at p. 5276) that:
"A partnership must be regarded as a separate person for the purpose of computing income with the result that the rules prescribed in Division B (Computation of Income), including paragraph 69(1)(a), apply to a partnership as if it were a person."
It was not relevant that some of the limited partners, who dealt at arm's length with the controlling individual, subscribed for units in the partnership in the year of the purchase, but subsequent to the time of the purchase.
Chutka v. The Queen, 2001 DTC 5093, Docket: A-267-98 (FCA)
A sale of equipment by a corporation to a partnership whose general partner was wholly-owned by the same individual who owned the vendor corporation was found to be a non-arm's length transaction, with the result that s. 69(1)(a) applied to reduce the capital cost of the equipment to the purchasing partnership to the equipments fair market value. Linden J.A. found (at p. 5098) that "the fiction of a partnership as an entity separate from the partners is temporary and does not extend to colour the true legal nature of transactions at the time they are entered into by a partnership" and that both the vendor corporation and the general partner were persons and taxpayers within the meaning of the Act and were related persons, so that s. 251 deemed the transaction to occur not at arm's length. (followed in Deptck v. The Queen, 2002 DTC 1835 (TCC))
Ottawa Valley Power Co. v. MNR, 69 DTC 5166, [1969] CTC 242 (Ex Ct), aff'd 70 DTC 6223, [1970] CTC 305, [1970] S.C.R. 941
In finding that improvements which Ontario Hydro made free of charge to the plant of the taxpayer in order that the taxpayer could provide 60 cycle power rather than 25 cycle power did not result in the acquisition of property by the taxpayer "by gift" for purposes of s. 20(6) of the pre-1972 Act, Jackett P. stated (p. 5172) that he "would have grave doubts, however, about applying paragraph (c) to capital equipment supplied free of charge by one business man to another for business reasons, even if the particular transaction were legally a 'gift'". In any event, the transaction was not a gift because the expenditure by Ontario Hydro enabled it to receive 60 cycle power from the taxpayer.
See Also
The Queen v. Yelle, 2010 DTC 5128 [at 7083], 2010 ABPC 94
The taxpayer, who was a member of a partnership, was accused tax evasion under s. 239(1)(a) in connection with capital cost allowance claims made by the partnership on software that it had purchased at an allegedly inflated price from a vendor who was alleged not to deal at arm's length with the partnership. In denying the taxpayer's motion for a directed verdict, Fradsham J. noted at para. 26 that the "taxpayer" referred to in s. 69(1)(a) can be a partnership, and at para. 35 that, in the phrase "where a taxpayer has acquired anything from a person whom the taxpayer was not dealing at arm's length," the "when" refers to the time of the "dealing" rather than the subsequent time that the acquired property is transferred.
Heron Bay Investments Ltd. v. The Queen, 2009 DTC 1606, 2009 DTC 1288
Hogan, J. indicated that if he accepted the taxpayer's evidence that a loan made by the taxpayer on a non-recourse basis to a related corporation was worth less than the amount advanced, this would not help the taxpayer in securing a doubtful debt deduction given that s. 69(1)(a) would have applied at the time the loan was made to reduce the cost of the loan to its fair market value.
Westward Explorations Ltd. v. The Queen, 2006 DTC 2443, 2006 TCC 105
An 11.12% interest in a gold mine that the taxpayer purchased was to be valued, for purposes of s. 69(1)(a) of the Act, on the basis that the whole mine, which was estimated by the Crown's expert to have a resource of 246,700 ounces (proven and probable - 29,600; possible - 25,100; and drill indicated - 192,000), and that that resource should be valued at $25 per ounce. The inferred ounces included in the valuation of the taxpayer's expert were too speculative.
CIT Financial Ltd. v. The Queen, 2003 DTC 1138, 2003 TCC 544
The fair market value of custom software that a New Zealand company had developed to run its steel mill was found to have a fair market value equal to the amount shown in the New Zealand company's records as being the cost, plus a 70% adjustment factor to reflect the fact that most companies' tracking systems do not record between 30% and 70% of the real effort that goes into software. The capital cost to the taxpayer of the software was reduced from the purchase price to this amount.
Marcantonio v. MNR, 91 DTC 917 (TCC)
The taxpayer, an optometrist, sold lenses and frames which he, in turn, had purchased essentially at the same price from a related corporation ("Andrea"). Given that the relationship between the taxpayer and Andrea was that of retailer/wholesaler, the fair market value of the goods purchased from Andrea should be their wholesale price rather than their retail price. The taxpayer had failed to successfully challenge the basis of the Minister's reassessment, which was to allow the deduction by the taxpayer of an amount equal to the cost to Andrea of the lenses and frames plus 115% of its payroll costs. However, Mogan J. indicated that he assumed that the Minister would do what was possible to avoid the double taxation that would result from not reassessing Andrea to reduce its income accordingly.
Administrative Policy
28 July 2014 T.I. 2014-0532651E5 - Loan to charitable foundation
Canco advances the Loan to a related charitable foundation. The Loan is not issued at a discount and matures in X years. Are there any tax consequence to Canco to the Loan not bearing interest? CRA stated:
Where the cost of the Loan is less than the amount payable at maturity, there will be a deemed accrual under paragraph 7000(2)(a) of the Regulations. However, because the Loan was made between two non-arm's length parties, paragraph 69(1)(a)… may apply to reduce the cost of the Loan to Canco. If the Loan is not repayable at the demand of Canco, it is possible that the fair market value of the Loan could be less than the amount advanced by Canco under the Loan. If that is the case, then paragraph 69(1)(a)… could deem Canco to have acquired the Loan at a cost equal to the fair market value of the Loan, triggering the deemed accrual under paragraph 7000(2)(a)… .
27 March 2013 Folio S4-F3-C1
CRA will consider a price adjustment clause to represent pricing at fair market value if:
- the agreement reflects a bona fide intention of the parties to transfer property at FMV;
- the purported FMV is determined by method that is fair and reasonable in the circumstances (which does not necessarily entail using CRA's preferred method, nor engaging a valuation expert);
- the parties agree that a CRA or Court valuation, if any, will supersede the price otherwise determined; and
- the excess or shortfall is actually refunded or paid, or legal liability therefor is adjusted (para. 1.5).
Price adjustment clauses involving shares may use a number of adjustment mechanisms. CRA non-exhaustively mentions changes in redemption value, the issuance of a note or change in the principle amount of a note, or a change in the number of shares issued - although CRA recommends against using the latter because of inherent legal and technical difficulties (para. 1.6).
8 January 2002 Memorandum 2001-009735 -
Where Mr. A sold shares of Opco to a son and daughter in consideration for promissory notes that were non-interest bearing and repayable in annual instalments, the cost of the Opco shares acquired by the son and daughter were equal to the fair market value of the promissory notes, which was lower than the fair market value of the Opco shares. CCRA stated that:
"In various 'butterfly' rulings ... we generally accept, as a statement of fact from the particular taxpayer, that a non-interest bearing note that is payable on demand and issued as consideration for certain property acquired by the taxpayer may have a fair market value equal to its stated principal amount."
10 January 1992 Memorandum (Tax Window, No. 17, p. 16, ¶1773)
Where shares are issued by a corporation on the conversion of debt owed by the corporation to a non-arm's length shareholder, the value of the debt rather than its principal amount must be considered as the amount paid to acquire the shares when determining whether the cost of the shares is limited by s. 69(1)(a).
8 November 1990 T.I. (Tax Window, Prelim. No. 2, p. 10, ¶1046)
Ss.69(1)(a) and 80(1) both will be applied where a creditor accepts low fair market value shares in satisfaction of the debt previously owing to it.
87 C.R. - Q.68
Where additional shares of an insolvent corporation are acquired by the taxpayer, any cost basis denied by s. 69(1)(a) may be treated as a contribution of capital for purposes of s. 53(1)(c).
81 C.R. - Q.3
When a shareholder advance is paid off with the proceeds of a day-light loan and the proceeds are then used by the shareholder to subscribe for shares, RC will not invoke the application of s. 69(1)(a) to the shares issued, if the corporation agrees to the application of s. 80, and vice versa.
IT-405 "Inadequate Considerations and Dispositions"
Paragraph 69(1)(b)
Cases
DMWSHNZ Ltd. v. Commissioners for Her Majesty's Revenue and Customs, [2015] BTC 32, [2015] EWCA Civ 1036,
The taxpayer, which had been issued 10-year floating-rate notes on its sale of shares of a New Zealand subsidiary to a third party, subsequently demanded repayment of 43% of the Loan Notes. At issue was whether this qualified under s. 171A of the Taxation of Chargeable Gains Act (U.K.) as a transaction in which the taxpayer “disposes of an asset to a person who is not a member of the group.” In finding that this requirement was not satisfied, Lewison LJ stated (at paras. 50-1):
Ms Yang argued that… the relevant asset upon which to concentrate is the Loan Notes. Even after the debt was repaid the Loan Notes continued in existence, not least because the Issuer still had the obligation to cancel the Notes… . In addition the creditor's rights were transferred to the Issuer even if only for a scintilla temporis.
…I do not believe that the approach to interpretation of taxing statutes laid down by Barclays Mercantile Business Finance Ltd v Mawson [[2004] UKHL 51, [2005] 1 AC 684] with its insistence on a realistic view of the facts leaves any scope for angels, pinheads or scintillae temporis. …[I] n the real world when the debt was repaid the obligation to pay was discharged; and there were no remaining creditor's rights that could have been transferred to the Issuer. I cannot see that the world of [capital gains tax] compels any different conclusion.
…[T]he Issuer's obligation to cancel Notes which have been repaid (and to alter the relevant entries in the register) is of an administrative nature which only the Issuer can perform; the performance of which does not require or presuppose that the Issuer owns the Notes in any sense.
Bouchard v. The Queen, 83 DTC 5193, [1983] CTC 173 (FCTD)
S.69(1)(b)(i) did not apply to a transfer of land by the taxpayer to his son and daughter-in-law where they already had the beneficial ownership of the land under a parol trust. The Statute of Frauds had not been pleaded by the Minister, and even if it had, the invoking of the Statute "would deprive the plaintiff from establishing what he conceived to be the true nature of the transaction and that would be contrary to the public interest" (p. 5201).
See Also
Shepp v. The Queen, 99 DTC 510, Docket: 96-541-IT-G (TCC)
In obiter dicta, Lamarre Proulx TCJ. doubted that s. 69(1)(b) could be applied on the basis that there was a disposition of an "economic interest" when Class B shares, which were (unsuccessfully) alleged by the Minister to have little value, were made convertible into Class A shares that did have significant value. Lamarre TCJ. stated (at p. 522):
"I do not see how a taxpayer who has not disposed of his shares could be said to have disposed of property for proceeds of disposition when the value of those shares may fluctuate while he holds them."
Gee-Gee Investments Ltd. v. MNR, 94 DTC 1419 (TCC)
The date at which a residence was to be valued for purposes of determining the capital gain realized by the taxpayer with respect to the transfer of the residence by the taxpayer to a shareholder with which it did not deal at arm's length was the date of sale and transfer of the residence to the shareholder rather than the prior date at which the shareholder had been granted an option to acquire the residence from the taxpayer.
Berry v. Warnett, [1980] T.R. 299 (C.A.), rev'd [1980] BTC 239 (HL)
"[T]he ordinary primary meaning of 'gift' is a voluntary transfer of property made without consideration."
The Queen v. Littler, 78 DTC 6179, [1978] CTC 235 (FCA)
A sale by the taxpayer to his sons of shares for their market price at a time when the taxpayer had insider knowledge that an offer would be made for the shares at a price substantially higher than that market price was not a transaction whereby the taxpayer "dispose[d] of property directly or indirectly by way of gift" within the meaning of a former gift-tax provision of the Act. "A contract of sale, which is, by definition, a transfer of property for a consideration, cannot be a gift, which is, by definition, a disposition of property without consideration."
Administrative Policy
3 March 2015 T.I. 2014-0519981E5 F - Donation avec charge / Gift with a charge
An individual donates a real estate property with a fair market value of $200,000 that is charged with a hypothec of $100,000. After noting that under the applicable (Quebec) civil law "in order for there to be a donation, there must among other things be a donative intention," as to which CRA could not comment, and indicating that a real estate property is "a single" property, CRA stated (TaxInterpretations translation):
[I]f it is established that there was a donation agreement under the civil law, under subparagraph 69(1)(b)(ii) the proceeds of disposition of the property to the donator will be deemed to be equal to $200,000.
Under paragraph 69(1)(c, the cost of acquisition of the property to the donee of the encumbered donation will be deemed to be equal to $200,000. …[T]he same interpretation would apply for 2016 and subsequent taxation years notwithstanding the amendment to that paragraph… .
25 October 2013 T.I. 2013-0484321E5 F - Donation entre vifs / inter vivos gift
Does s. 69(1)(b)(ii) apply only to individuals? CRA indicated that the interpretation of the term "gift inter vivos" is not a tax issue but a matter of provincial private law, stating that in the absence of an express contrary provision or sham, "the legal relations created by the parties must be respected in tax matters."
6 August 2013 T.I. 2012-0469481E5 F - Benefit under trust
An estate sold personal-use real estate to one of its beneficiaries for a price less than the property's fair market value, so that s. 69(1)(b)(i) applied. The capital gain to the estate was payable to a beneficiary other than the purchaser.
CRA rejected a submission - that the exception in s. 107(1)(a) applied to exclude a taxable benefit to the purchaser because later in the same year the purchaser sold the property at a capital gain which was increased by the amount of the purchaser's reduced cost for the property. Accordingly, that difference represented a taxable benefit to the purchaser, but such amount was required to be added to the purchaser's adjusted cost base under s. 52(1) – with a resulting reduction in the capital gain on the subsequent sale.
23 April 2013 Memorandum 2012-0466081I7 F - Usufruct created under French legislation
A Canadian-resident taxpayer who lived outside Canada made a transfer without consideration (the "Gift") to her adult children of a building and subjacent land situated in France (the "Building"), which had appreciated subsequent to its acquisition by the taxpayer. The Gift was made as a shared gift (donation-partage) in accordance with s. 1075 of the French Civil Code ("C.c.f."), with the taxpayer reserving, as permitted by s. 949 of the C.c.f., a usufruct in her favour during her lifetime (the "Arrangement"), so that she was entitled to all the income from the Building.
After noting that the creation of a usufruct governed by the C.c.f. did not give rise to a deemed trust under s. 248(3), CRA stated (TaxInterpretations translation):
…the Taxpayer is deemed to have disposed of the Building for consideration equal to its FMV and…the children were deemed to have acquired the property for the same value, all in accordance with the provisions of paragraphs 69(1)(b) and (c).
After also indicating that s. 43.1(1) applied, it stated:
...the taxpayer is deemed to have disposed of her Arrangement respecting the Building for proceeds equal to its FMV at the time of its creation…and to have acquired it, immediately after that time, at a cost equal to such deemed proceeds of disposition.
20 November 2008 Memorandum 2008-0281411I7 - Addition of Beneficiaries
The sole trustee (the Trustee) of a family trust who also was one of the "Existing Beneficiaries" exercised a power under the Trust Indenture to add beneficiaries to the Trust who were unrelated to the Existing Beneficiaries. The Trustee then resigned and a replacement trustee became trustee. The Trust protector then removed the replacement trustee and appointed a corporation resident in Canada as trustee.
After noting that the interest of the beneficiary of a discretionary trust "is essentially a right… to be considered by the trustee as to whether or not any trust property…should, in the trustee's discretion, be distributed…see Gartside v. I.R.C., [1968] A.C. 553 (HL)," CRA stated:
When additional beneficiaries are added to a trust, whether as a result of a variation of the trust or pursuant to the terms of the trust, the rights of the existing beneficiaries...are arguably diminished and as a result, each of the existing beneficiaries realizes a disposition of a part of the bundle of rights that forms his or her interest in the discretionary trust….[However,] the addition of the New Beneficiaries will not result in any actual or deemed proceeds of disposition in respect of that disposition other than to the Existing Beneficiary who is the trustee of the Trust.
However, as the trustee
is also a beneficiary of the Trust who has realized a disposition of a part of his interest in the Trust as a result of the addition of the New Beneficiaries, we believe that a reasonable argument can be made to apply subparagraph 69(1)(b)(ii) to the portion of his interest that has been disposed….[W]e suggest that you contact the Valuation Services Section….
31 May 2012 T.I. 2011-0426091E5
A partnership was leasing property from a partner, and then is wound up as described in s. 98(5), with the former partner continuing to use the particular property in the business of the terminated partnership. If the leasehold interest is extinguished by merger, s. 98(5) would not apply to the leasehold interest. The terminated partnership would be considered to have disposed of its leasehold interest for nil proceeds of disposition (having regard to the BCN case, 79 DTC 5068), thereby resulting in a terminal loss.
31 December 2004 Memorandum 2004-0091781I7
Our position is that where, in a non-arm's-length situation, the fair market value of the shares exceeds the redemption amount, the difference will be taxed as a capital gain rather than as a deemed dividend. Paragraph 84(3)(a) speaks only of the "amount paid" where shares are redeemed. It does not stipulate fair market value payment or the lack of fair market value payment or even the necessity for one as opposed to the other; only that the amount paid in excess of the paid-up capital of the shares redeemed shall create a deemed dividend. Furthermore, although paragraph 69(1)(b) deems a taxpayer to have received proceeds of disposition equal to the fair market value of the property transferred in a non-arm's length situation, it does not apply to adjust the "amount paid".
2004 APFF Roundtable Q. 15, 2004-0086821C6
Respecting the situation where a subsidiary purchases for cancellation a portion of the common shares in its capital held by its wholly-owning parent, CRA noted that s. 69(1)(b) would apply only for capital gains purposes and not for purposes of determining the amount of a deemed dividend under s. 84(3), given that the presumption in s. 69(1)(b) applied only with respect to the person disposing of property.
14 September 2004 T.I. 2004-008220 -
When asked whether the demolition of a rental property would trigger a disposition at fair market value, the Directorate indicated that the demolition would give rise to a disposition with nil proceeds, although in general s. 13(21.1)(b) would restrict the deduction of the resulting terminal loss to half of the amount otherwise calculated.
2001 Ruling 2001-007094 -
Although the issue is not referred to, the disposition of property by a corporation pursuant to the exercise of an option by a partnership of which the corporation was a general partner was considered to give rise to proceeds of disposition equal to the exercise price rather than the fair market value of the property.
2000 Ruling 2000-002395 -
A vertical merger between a US corporation with a Canadian branch business ("Absorbco") and its US parent ("Subco 3") under which Absorbco survives the merger, the US parent of Subco 3 exchanges its shares of Subco 3 for shares of Absorbco, and the shares of Subco 3 are cancelled, would qualify as a foreign merger. Subco 3, as the non-surviving corporation in this merger, will be considered to have disposed of all its assets and liabilities to Absorbco for their fair market value except that the shares of Absorbco instead will be disposed of by the non-resident parent of Subco 3 at fair market value. However, as the merger is described in Article XIII(8) of the US-Canada Convention, it is a transaction with reference to which the competent authority of Canada may enter into an agreement under s. 115.1.
17 April 2000 T.I. 1999 - 000928
S.69(1)(b) could apply to the granting of a non-exclusive licence of intellectual property to a related person.
14 January 1999 T.I. 5-982855
Where shares bearing a non-cumulative dividend of 10% are exchanged on an s. 86 reorganization for shares bearing a non-cumulative dividend of 15%, the shareholder with the increased dividend rate will be considered to have received an s. 15 benefit, and other shareholders may be considered to have received fair market value proceeds under s. 69(1)(b).
6 November 1997 T.I. 5-972875 -
An individual shareholder ("A") owns 20 preferred shares of a CCPC ("Opco") having a fair market value of $20 and an unrelated individual ("B"), who is the only other shareholder of Opco, owns 80 common shares having a fair market value of $1,000. If A exchanges his 20 preferred shares in Opco for 20 common shares of Opco pursuant to s. 51 or 86, he will receive a benefit under s. 15(1) and B, if he does not deal at arm's length with A, would be deemed to have received proceeds of disposition equal to the fair market value of B's economic interest given up in Opco.
14 November 1996 T.I. 9635535
In a response to several questions concerning the tax consequences to both the employee and the non-arm's length transferee where the transferee 1) sells the option in an arm's length sale, 2) exercises the option, 3) receives dividends on the shares, and 4) disposes of the shares in an arm's length sale, CRA stated:
With respect to paragraph 69(1)(b) of the Act, it is our view that it does not apply to an employee/transferor who is subject to the provisions of paragraphs 7(1)(c) or (d) of the Act by virtue of paragraph 7(3)(a) of the Act.
12 April 1994 T.I. 940231 (C.T.O. "Intellectual Property")
S.69(1)(b) would apply where a parent corporation owns patents, trademarks and copyright used exclusively by one of its subsidiaries in the subsidiary's world wide business without a fair market value fee being charged for the use of such intellectual property. The word "anything" extends to intangible property.
93 C.R. - Q. 39
If a person enters into an agreement of purchase and sale (or an option) with a person with whom he does not deal at arm's length on fair market value terms and the fair market value of the property on closing is greater than the value in the agreement date, RC will apply s. 69(1)(b) to the person to increase the proceeds to fair market value at the time of disposition. Similarly, if the fair market value of the property at the time of disposition is less than the purchase price, RC will apply s. 69(1)(a) to the purchaser. However, the policy in IT-405, para. 5 applies.
Revenue Canada Round Table TEI Conference, 7 December 1993, Q. 9 (C.T.O. "Non-Arm's-Length Purchase and Sale Arrangement")
Where there is an extended delay between the date a non-arm's agreement is entered into and the closing of the agreement, RC generally would readjust the purchase price or proceeds of disposition of the property pursuant to s. 69(1)(a) or (b) where the property has depreciated or appreciated. A two-sided adjustment will be permitted where there is an "honest error".
7 December 1993 Revenue Canada Round Table TEI Roundtable Q. 10, 5-933368
Where a company acquires from a person with whom it does not deal at arm's length an option to acquire property at a fixed price, s. 69(1)(b) "could be applied when the option is granted, if not granted at fair market value. However, the application may be more appropriate when the option is exercised. In our view, the benefit arising at the time of granting an option is often difficult to quantify ... ." Reference was made to IT-403R, para. 5-6.
26 January 1993 T.I. 923284 (November 1993 Access Letter, p. 512, ¶C245-051; Tax Window, No. 28, p. 1, ¶2383)
S.69(1)(b) does not apply to the provision of services for less than their fair market value.
92 C.R. - Q.21
S.69(1)(b)(i) will apply to a transfer of ownership of equity in a corporation in circumstances such as those in The Queen v. Kieboom, 93 DTC 6382 to deem the transferor to have received fair market value proceeds.
17 February 1992 T.I. (Tax Window, No. 16, p. 21, ¶1752)
A conveyance will not be precluded from being considered a gift by the payment by the donee of $1 as a legal formality.
30 November 1991 Round Table (4M0462), Q. 3.3 - Issuing of Shares: Consideration Less than the F.M.V. (C.T.O. September 1994)
Where a corporation that has two unrelated shareholders (Mr. A and Mrs. B) each holding one share, issues a third common share for nominal consideration to Mrs. B, Mr. A will be considered for purposes of s. 69(1)(b)(ii) to have made a gift of part of his economic interest in the corporation to Mrs. B. Because Mr. A has disposed of part of his economic interest in the corporation and not of the shares in the corporation, the adjusted cost base of the property disposed of by him will be nil.
18 December 1989 T.I. (May 1990 Access Letter, ¶1219)
s. 69(1)(b) will apply to a purchase for cancellation of shares held by a non-arm's length shareholder for a purchase price less than fair market value. The proceeds for purposes of s. 40(1) will be reduced by the amount of the deemed dividend under s. 84(3), which is based on the actual amount paid by the corporation for the shares.
86 C.R. - Q.23
The existence of a fixed price in a buy-sell agreement is not conclusive that the shareholders were not dealing at arm's length.
85 C.R. - Q.9
"Anything" includes intangible property, such as the right to use property. For example, s. 69(1) will apply where an individual rents farmland to his family-owned corporation at less than fair market value and deducts expenses related to the farmland that are in excess of the rents.
Articles
Marie Emmanuelle Vaillancourt, Alan Shragie, "Non-Arm's Length Stock Options Transfers", CCH Tax Topics, No. 1985, 25 March 2010, p. 1.
Innes, "If the Tax Treatment of Accrued Gains on Inventory at Death", Estates and Trust Journal, Vol. 12, 1992, p. 122.
Paragraph 69(1)(c)
Cases
Gervais v. The Queen, 85 DTC 5004, [1984] CTC 661 (FCTD)
A contract of sale cannot be a gift, which is a gratuitous transfer of property. The acquisition by the taxpayer of real property from his father for about 1/3 its fair market value pursuant to a deed of sale accordingly was not an acquisition of property by way of "gift" (there having been "no suggestion that the deed of sale was not what it was represented to be or was in any way simulated so as to disguise a gift").
Hutterian Brethren Church of Wilson v. The Queen, 79 DTC 5474, [1980] CTC 1 (FCA)
The donation of services, such as farming labour, by members of a Hutterite religious colony to their corporation did not constitute an acquisition of property by the corporation, nor did it constitute a gift since there was consideration for the provision of those services in the form of a covenant of the corporation (as set out in its memorandum of association) to support, maintain, instruct and educate the members of the colony.
Administrative Policy
10 October 2014 APFF Roundtable Q. , 2014-0538621C6 F
Does CRA consider, similarly to Revenu Québec, that a transfer of an immovable for $1 to a non-arm's length person can be a gift? After referring to s. 8.1 of the Interpretation Act, CRA responded (TaxInterpretations translation):
[T]he determination of the nature of a particular transaction, as sale or gift, must be made on the basis of the genuine legal relations between the parties. In the absence of an express provision to the contrary in the ITA or a finding that the transaction is a sham, the genuine legal relations must be respected in tax matters.
26 June 2013 T.I. 2013-0490711E5 F - Disposition en contrepartie de 1$
Could the acquisition of a property for consideration of one dollar qualify as an acquisition by gift for purposes of s. 69(1)(c)? The Directorate referred to the relevance of Quebec law per s. 8.1 of the Interpretation Act, and quoted the statement in s. 1806 of the Quebec Civil Code that:
Gift is a contract by which a person, the donor, transfers ownership of property by gratuitous title to another person, the donee.
After noting that the Civil Code contemplates different types of gifts (including "remunerative gifts and gifts with a charge [where only the net amount donated is considered a donation per s. 1810 CCQ]" and that all "such gifts can be gifts for purposes of paragraph 69(1)(c)," the Directorate stated (TaxInterpretations translation):
Thus, the determination of the nature of a particular transaction, to assess whether it is a true gift or sale, must be made on the basis of the legal relationships created by the contract of acquisition of the property. Indeed, in the absence of an express provision to the contrary in the Act or a finding of sham, the legal relationships created by the contract of acquisition must be respected for taxation purposes.
Editorial note: a donation contract in Québec is considered a unilateral contract by which property is transferred "by gratuitous title."
21 December 2012 Memorandum 2009-0327221I7 - Paragraph 7(1)(e) - Death of a Taxpayer
After noting that a deceased employee would be deemed under s. 7(1)(e) to dispose of unexercised stock options at fair market value on death, CRA stated:
Where a deceased taxpayer's estate receives an employee stock option, we generally accept to apply paragraph 69(1)(c). Consequently, the option is deemed to have been acquired by the estate at a cost equal to its fair market value. ... In general, if an estate exercises an employee stock option, subparagraph 49(3)(b)(ii) will apply to add the adjusted cost base (ACB) of the option to the cost of the shares acquired under the option.
Income Tax Technical News No. 44 13 April 2011 [archived]
In the absence of a specific provision in the Act to the contrary...a corporation that receives property from its shareholder for no consideration has a cost basis for that property equal to its FMV.
IT-464R, para. 8
"When a tenant makes improvements and alterations to leased property and subsequently abandons them, they are not considered to have been acquired by the landlord as a gift, bequest or inheritance under paragraph 69(1)(c)."
22 May 1997 T.I. 5-964143
Where property is transferred to a trust for purposes of donating an equitable interest in the trust to a charity, the proceeds of disposition arising on the donation will be equal to the fair market value of the property at that time rather than the present discounted value of the equitable interest in the trust.
22 January 1996 T.I. 953006 (C.T.O. "Gift or Sale?")
"Should the properties have been bequeathed or gifted, the ACB to the recipient will, by virtue of paragraph 69(1)(c), be the FMV at the time of transfer, whereas, if it is decided that the properties were sold for $1,000 each, the ACB will be $1,000, notwithstanding that the FMV was far in excess of that amount."
May 1995 Executive Institute Round Table, Q. 24 (C.T.O. "Employee Stock Option")
Where an estate acquires employee stock options by way of bequest, it is deemed to acquire the property at fair market value. Provided that the shares acquired upon exercise of the option are capital property, s. 49(3)(b)(ii) will include the adjusted cost base of the option at the time of exercise.
October 1992 Central Region Rulings Directorate Seminar, Q. B. (May 1993 Access Letter, p. 229)
RC assumes, in the absence of clear evidence to the contrary, that an expropriation in a foreign jurisdiction has occurred in accordance with the laws of that jurisdiction. Accordingly, where property that previously was expropriated is returned to an individual that transaction will be governed by s. 69(1)(c).
September 1992 B.C. Revenue Canada Round Table, p. 21 (May 1993 Access Letter, p. 227)
Where personal property is transferred to a trust with the creation of a lifetime income interest payable only to the transferor and a residual capital interest payable to another person, then provided the remainder interest was acquired by the trust by way of gift, s. 69(1)(c) generally will deem the trust to have acquired the remainder interest at its fair market value.
Articles
Atlas, "Tax Planning for Foreign Inheritances", Tax Topics, No. 1247, 1 February 1996
Discussion of the determination of the cost of property held by a non-resident trust.
Subsection 69(2)
Cases
Indalex Ltd. v. The Queen, 86 DTC 6039, [1986] 1 CTC 219 (FCTD), aff'd 88 DTC 6053, [1988] 1 CTC 60 (FCA)
The taxpayer purchased its supplies of aluminium from a Burmudan affiliate ("Pillar International") which in turn purchased the aluminium from an arm's-length supplier ("Alcan"). Reed, J. accepted the Crown's contention that the closest arm's length comparable to the sales by Pillar International to the taxpayer were the sales by Alcan to Pillar International. In light of the relatively minor functions performed by Pillar International, the taxpayer was unable to justify the full 5% differential between the aluminium price paid by the taxpayer and the lower net price (after taking into account discounts paid by Alcan) paid by Pillar International.
In the Court of Appeal, it was further held that Reed, J. erred in concluding that a 1% differential was justified based on the fact that the global purchasing power of Pillar International permitted it to obtain from Alcan a price better than that which the taxpayer could have negotiated. "That greater bargaining power was exclusively due to the pooling of the purchasing power of a number of members of the Pillar group ... where non-arm's length parties combine to obtain an advantage from an outsider not available to them individually, any allocation of the advantage among them except on a pro rata basis has to be justified."
Administrative Policy
93 C.R. - Q. 33
Discussion of weaknesses of comparable profit method.
93 C.M.TC - Q. 17
The comparable profit method set out in the regulations to IRC s. 482 is very unlikely to produce a result that is compatible with the arm's length principle. The periodic adjustment rule also conflicts with the arm's length principle.
93 C.M.TC - Q. 13
RC will consider allowing a reasonable mark-up on charges for services (including computer services) provided by non-residents to related Canadian entities where the non-resident is in the business of providing such services to third parties and the rates charged to the Canadian entities are comparable with the charges to third parties.
89 C.R. - Calderwood Paper (C.42)
The operative words 'reasonable in the circumstances' may mean fair market value or another amount, depending on the facts of a particular case."
General discussion
IC 94-4 "International Transfer Pricing: Advance Pricing Agreements (APA)"
IC 87-2 "International Transfer Pricing and Other International Transactions"
IT-468R "Management or Administration Fees Paid to Non-Residents"
RC is prepared to accept an allocation of the costs, direct and indirect, reasonably attributable to providing the relevant services to the Canadian taxpayer. Mark-ups or profit elements are appropriate only in certain circumstances.
Articles
Purdy, Zanchelli, "Calculating and Supporting Management Fees (A Departure from the 'Back of the Envelope' Approach)", International Tax Planning, 1996 Canadian Tax Journal, Vol. 44, No. 1, 1996, p. 157.
Boidman, Lawlor, "Transfer Pricing in the Absence of Comparable Market Prices: Canada", Studies on International Fiscal Law, Volume LXXIIa, p. 323 (International Fiscal Association, Rotterdam, 1992).
Finance
1996 A.P.F.F. Round Table No. 7M12910: Discussion of position on transactional net margin and comparable margin of profit methods.
Subsection 69(3)
Cases
R. v. Kleysen, 96 DTC 6265 (Man QB)
After noting the submission for the accused that the relevant valuation test for sale of equipment by Canadian taxpayers to a related off-shore entity was the "reasonable amount" test in s. 69(3) rather than the "fair market value" test in s. 69(1), Schwartz J. found (at p. 6284) that he was not satisfied that the values used by the accused in their dealings with the off-shore corporation were unreasonable in all the circumstances.
Administrative Policy
18 March 1992 T.I. (Tax Window, No. 18, p. 4, ¶1816)
Where a Canadian subsidiary guarantees the U.S. bank debt of its U.S. parent, the amount of a reasonable guarantee fee will be included in its income as an amount for other services. The decision in Melford Developments Inc. v. The Queen, 80 DTC 6075 at 6076-77 (FCTD), affirmed 81 DTC 5020 (FCA), affirmed 82 DTC 6281, [1982] 2 S.C.R. 504 established that a loan guarantee constitutes other services.
91 C.R. - Q.30
Where a Canadian subsidiary guarantees the loan obligations of a foreign parent, s. 69(3) will apply to deem the amount that would have been reasonable in the circumstances, if the corporations had been dealing at arm's length, to have been received or receivable by the Canadian subsidiary.
Articles
Yukich, "Taxation of Export Sales from Canada", 1993 Corporate Management Tax Conference Report, c. 9.
Subsection 69(4) - Shareholder appropriations
Cases
Boardman v. The Queen, 85 DTC 5628, [1986] 1 CTC 103 (FCTD)
The word "appropriated" embraces an action of a third party - here, a court order directing that capital properties of the corporation be transferred to the divorced wife of the corporation's shareholder.
See Also
Husky Oil Ltd. v. The Queen, 2010 DTC 5089 [at 6887], 2010 FCA 125
Sharlow, J.A. found that the "gift portion" exception to the rollover rule in s. 87(4) did not apply to a transaction in which the taxpayer received, on an amalgamation of its subsidiary with a subsidiary of another corporation, preferred shares that had a lower fair market value than the shares which it held of the subsidiary going into the amalgamation. In rejecting an alternative submission of the Minister that the amalgamation entailed an appropriation of property of the taxpayer (namely, its shares of its subsidiary) for the benefit of its shareholder (who wished this transaction to occur as part of a larger transaction), so that such shares of the subsidiary were deemed to be disposed of for their fair market value, Sharlow, J.A. stated (at para. 71-72):
"If subsection 69(4) can be applied to the disposition of shares to which para. 87(4)(a) also applies, the result in many cases (and certainly in this case) would be two statutory deeming rules creating two different statutory fictions. That cannot be ... In my view, the specific provisions of subsection 87(4) must trump the more general rule in subsection 69(4)."
Javalin Founderies & Machine Works Ltd. v. MNR, 67 DTC 392 (TAB)
In finding that a transaction under which the individual non-resident shareholder of a Canadian corporation took possession of all its assets after the corporation ceased to carry on business transactions subject to s. 17(5), the Board noted (at p. 398) that "if the purpose of section 17 ... is to prevent companies from understating their income by distributing stock-in-trade to shareholders either as gifts or upon winding-up without ascribing any value thereto in terms of payment by the shareholder", whereas here the shareholder had taken possession of capital assets.
Administrative Policy
15 November 2013 Memorandum 2013-0478621I7 F - Transfer of intangibles - TP adjustments
Pursuant to a sales agreement between Canco, its immediate non-resident parent (Parent) and the ultimate U.S. parent of Canco (Publico), as vendors, and an arm's length purchaser (Acquireco1), for the sale of Division 1 for a sum of U.S.$XX, Canco disposed of assets of Division 1 to a subsidiary of Acquireco1 for their book value. The Montreal TSO took the view that the Division 1 assets included intangible assets whose value was not reflected in this selling price. Similar transactions occurred for the sale of Division 2 to Acquireco2.
Respecting a TSO proposal to apply s. 69(4) (and before finding that an adjustment should be made under s. 247(2)), CRA stated (TaxInterpretations translation):
[T]he application of subsection 69(4) requires in particular that property of a corporation be appropriated to a shareholder or for its benefit. …Therefore, considering that Publico is not a shareholder of Canco, subsection 69(4) cannot be applied.
Subsection 69(5) - Idem [Shareholder appropriations]
Administrative Policy
14 May 2015 CLHIA Roundtable Q. , 2015-0573841C6
At the 2005 CALU Roundtable (2005-0116631C6), the CRA indicated that s. 69(5) would likely take precedence over s. 148(7) on the wind-up of a corporation under s. 88(2), so that a distributed interest in a life insurance policy would be disposed of at fair market value rather than cash surrender value. In confirming that this position "remains unchanged," CRA stated:
[T]he general rule is that where two provisions in the same statute conflict, the more specific provision should take precedence. … While we would generally expect subsection 69(5) to take precedence over subsection 148(7)… this approach is subject to a review of the particular facts and circumstances of an actual case… .
Subsection 69(11) - Deemed proceeds of disposition
Administrative Policy
2 December 2014 CTF Roundtable, Q2(c)
Must corporations be affiliated or related or both in a loss consolidation arrangement? CRA responded:
The CRA will consider ruling requests where the corporations are related and affiliated, as well as circumstances in which the corporations are related.
…[W]here the corporations are affiliated but not related…the meaning of affiliated will be determined on the same criteria as stipulated in subsection 69(11)… . In other words, where two corporations are not related, but are affiliated, the CRA would consider a loss consolidation arrangement only if the corporations are affiliated by reason of de jure control.
2014 Ruling 2014-0523221R3 - Amalgamation of mutual funds
underline;">: Proposed transactions. C1, which is a smaller mutual fund corporation than C2, will amalgamate with C2 to form Amalco. C1, C2 and Amalco have different series of mutual fund shares each tracking what for securities law purposes is regarded as a separate mutual fund as well as nominal value voting common shares. On the amalgamation, the former common shareholders of C1 will acquire a majority of the voting common shares of Amalco. Both C1 and C2 have capital loss carryforwards. C1 will make step-up designations under s. 111(4)(e).
Rulings
include: As a result of the amalgamation there will be an acquisition of control of C1 pursuant to s. 256(7)(b)(iii), and there will not be an acquisition of control of C2. Ss. 69(11) and 111(5.5) will not apply.
21 October 2013 Memorandum 2013-0505831I7 - Rollover and subsequent disposition of property
The taxpayer, a Canadian corporation, transferred all its voting and participating shares of Subco, a non-resident subsidiary wholly-owned corporation, to Forco (another controlled foreign affiliate) in consideration for shares of Forco. Forco also exercised an option to acquire IP from a group member. Forco sold its IP to an arm's length US purchaser ("Purchaseco") and another company in the Purchaseco group, and then sold all its shares of Subco to Purchaseco.
In finding that s. 69(11)(b) did not apply to deny a rollover under s. 85.1(3) for the drop-down of Subco to Forco, the Directorate stated:
The fact that there is no tax payable under the Act by Forco with respect to its gain on the disposition of the Subco shares is due to the fact that the disposition does not result in any income under the Act (Forco is simply not subject to tax under subsection 2(3) of the Act), not because an exemption from tax payable under the Act is available to Forco. Consequently, paragraph 69(11)(b) of the Act would not apply… .
The Directorate went on to state:
[A] court would probably be reluctant to apply subsection 69(11) of the Act to deny the benefit of the 85.1(3) rollover where the conditions to apply subsection 85.1(3) of the Act are met (considering paragraph 95(6)(b) of the Act) and where subsection 85.1(4) of the Act does not apply in a particular situation.
S. 85.1(4) was not considered here because there was to be a separate referral on that issue.
2002 Ruling 2001-011607 -
Where prior to the acquisition of Target, Target transfers assets on a rollover basis to a wholly-owned subsidiary of Target ("Xco"), and then following the amalgamation of Target with Newco, the cost to Amalco of the Xco shares is "bumped" under s. 88(1)(d) and those shares sold to an unrelated third party, s. 69(11) will not deem the disposition of the property acquired by Amalco on the amalgamation of Newco and Target to be for fair market value of proceeds.
1996 Tax Executives Round Table, Q. XIL (No. 9639150)
Where a taxpayer contributes property with an accrued gain to a loss corporation on a rollover basis and then, prior to the expiration of the three-year period, an unrelated third party acquires control of the loss company and elects under s. 111(4)(e) to step-up the cost base of the previously-transferred property, the deemed disposition under s. 111(4)(e) will be considered to be a disposition for purposes of s. 69(11).
18 August 1995 TI 9515455
Where a corporation ("Newco") incorporated by an individual (B) acquires all the shares of Oldco from another individual (A) with whom B deals at arm's length, and Newco winds up Oldco and "bumps" land held by Newco under s. 88(1)(d), with the land being transferred by Newco to B immediately after the wind-up, then provided that Newco has no losses, tax credits or balance of undeducted outlays or expenses of any kind, s. 69(11) would not ordinarily apply to deem the disposition of land to be at a cost amount other than the amount determined by s. 88(1)(a)(iii).
93 CPTJ - Q.14
In one recent case, RC concluded that a series of transactions which technically avoided the application of s. 69(11) because the subsequent disposition occurred after three years, were subject to GAAR.
91 CPTJ - Q.1
Whether the vendor has knowledge and control of the series of transactions may be considered when determining whether s. 69(11) applies.
89 C.R. - Read Paper (C.18)
S.69(11) may apply upon a butterfly of property to a minority corporate shareholder as part of a series of transactions that includes a later sale of the property, if the taxable income attributable to the gain on the sale is reduced by non-capital losses of the shareholder.
Articles
David M. Williamson, Michael H. Manly, "Subsection 69(11) - Unexpected Problems from Inappropriate Positions", Corporate Structures and Groups, Vol. V, No. 4, 1999, p. 285.
Marc N. Ton-That, "Unexpected Problems under Subsection 69(11)", Corporate Structures and Groups, Vol. V, No. 3, 1999, p. 268.
Subsection 69(13) - Amalgamation or merger
Administrative Policy
2 December 2014 Folio S4-F7-C1
1.98 In the case of an amalgamation or merger, there may not technically be a disposition of property from a predecessor corporation to the new corporation. Accordingly, subsection 69(13) deems the property of a predecessor corporation to have been disposed of immediately before the amalgamation or merger at its cost amount for the purposes of determining whether subsection 69(11) applies to the amalgamation or merger. The expression affiliated person is defined in subsection 251.1(1) except that, for the purposes of subsection 69(11), the affiliated person rules are to be read without the extended definition of control found in subsection 256(5.1). In other words, only de jure control is considered.
5 March 1992 T.I. 5-913271
In the case of an amalgamation described in s. 87(1), the cost amount of inventory of a predecessor for purposes of s. 69(13) would be its value as determined for the purpose of computing the predecessor's income for the taxation year ending immediately before the amalgamation.
Subsection 69(14) - New taxpayer
Administrative Policy
20 February 2003 T.I. 2002-015667
"The 'taxpayer' referred to in subsection 69(14) will include both the taxpayer that is the transferor in subsection 69(11), as well as each other person referred to in the wording contained in parentheses at the conclusion of paragraph 69(11)(a)".