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Income Tax Act (R.S.C., 1985, c. 1 (5th Supp.))

Full Document:  

Act current to 2022-11-28 and last amended on 2022-11-17. Previous Versions

PART IIncome Tax (continued)

DIVISION BComputation of Income (continued)

SUBDIVISION HCorporations Resident in Canada and their Shareholders (continued)

Marginal note:Non-arm’s length sale of shares

  •  (1) Where after May 22, 1985 a taxpayer resident in Canada (other than a corporation) disposes of shares that are capital property of the taxpayer (in this section referred to as the “subject shares”) of any class of the capital stock of a corporation resident in Canada (in this section referred to as the “subject corporation”) to another corporation (in this section referred to as the “purchaser corporation”) with which the taxpayer does not deal at arm’s length and, immediately after the disposition, the subject corporation would be connected (within the meaning assigned by subsection 186(4) if the references therein to “payer corporation” and to “particular corporation” were read as “subject corporation” and “purchaser corporation” respectively) with the purchaser corporation,

    • (a) where shares (in this section referred to as the “new shares”) of the purchaser corporation have been issued as consideration for the subject shares, in computing the paid-up capital, at any particular time after the issue of the new shares, in respect of any particular class of shares of the capital stock of the purchaser corporation, there shall be deducted an amount determined by the formula

      (A - B) × C/A

      where

      A
      is the increase, if any, determined without reference to this section as it applies to the acquisition of the subject shares, in the paid-up capital in respect of all shares of the capital stock of the purchaser corporation as a result of the issue of the new shares,
      B
      is the amount, if any, by which the greater of
      • (i) the paid-up capital, immediately before the disposition, in respect of the subject shares, and

      • (ii) subject to paragraphs 84.1(2)(a) and 84.1(2)(a.1), the adjusted cost base to the taxpayer, immediately before the disposition, of the subject shares,

      exceeds the fair market value, immediately after the disposition, of any consideration (other than the new shares) received by the taxpayer from the purchaser corporation for the subject shares, and

      C
      is the increase, if any, determined without reference to this section as it applies to the acquisition of the subject shares, in the paid-up capital in respect of the particular class of shares as a result of the issue of the new shares; and
    • (b) for the purposes of this Act, a dividend shall be deemed to be paid to the taxpayer by the purchaser corporation and received by the taxpayer from the purchaser corporation at the time of the disposition in an amount determined by the formula

      (A + D) - (E + F)

      where

      A
      is the increase, if any, determined without reference to this section as it applies to the acquisition of the subject shares, in the paid-up capital in respect of all shares of the capital stock of the purchaser corporation as a result of the issue of the new shares,
      D
      is the fair market value, immediately after the disposition, of any consideration (other than the new shares) received by the taxpayer from the purchaser corporation for the subject shares,
      E
      is the greater of
      • (i) the paid-up capital, immediately before the disposition, in respect of the subject shares, and

      • (ii) subject to paragraphs 84.1(2)(a) and 84.1(2)(a.1), the adjusted cost base to the taxpayer, immediately before the disposition, of the subject shares, and

      F
      is the total of all amounts each of which is an amount required to be deducted by the purchaser corporation under paragraph 84.1(1)(a) in computing the paid-up capital in respect of any class of shares of its capital stock by virtue of the acquisition of the subject shares.
  • Marginal note:Idem

    (2) For the purposes of this section,

    • (a) where a share disposed of by a taxpayer was acquired by the taxpayer before 1972, the adjusted cost base to the taxpayer of the share at any time shall be deemed to be the total of

      • (i) the amount that would be its adjusted cost base to the taxpayer if the Income Tax Application Rules were read without reference to subsections 26(3) and (7) of that Act, and

      • (ii) the total of all amounts each of which is an amount received by the taxpayer after 1971 and before that time as a dividend on the share and in respect of which the corporation that paid the dividend has made an election under subsection 83(1);

    • (a.1) where a share disposed of by a taxpayer was acquired by the taxpayer after 1971 from a person with whom the taxpayer was not dealing at arm’s length, was a share substituted for such a share or was a share substituted for a share owned by the taxpayer at the end of 1971, the adjusted cost base to the taxpayer of the share at any time shall be deemed to be the amount, if any, by which its adjusted cost base to the taxpayer, otherwise determined, exceeds the total of

      • (i) where the share or a share for which the share was substituted was owned at the end of 1971 by the taxpayer or a person with whom the taxpayer did not deal at arm’s length, the amount in respect of that share equal to the amount, if any, by which

        • (A) the fair market value of the share or the share for which it was substituted, as the case may be, on valuation day (within the meaning assigned by section 24 of the Income Tax Application Rules)

        exceeds the total of

        • (B) the actual cost (within the meaning assigned by subsection 26(13) of that Act) of the share or the share for which it was substituted, as the case may be, on January 1, 1972, to the taxpayer or the person with whom the taxpayer did not deal at arm’s length, and

        • (C) the total of all amounts each of which is an amount received by the taxpayer or the person with whom the taxpayer did not deal at arm’s length after 1971 and before that time as a dividend on the share or the share for which it was substituted and in respect of which the corporation that paid the dividend has made an election under subsection 83(1), and

      • (ii) the total of all amounts each of which is an amount determined after 1984 under subparagraph 40(1)(a)(i) in respect of a previous disposition of the share or a share for which the share was substituted (or such lesser amount as is established by the taxpayer to be the amount in respect of which a deduction under section 110.6 was claimed) by the taxpayer or an individual with whom the taxpayer did not deal at arm’s length;

    • (a.2) [Repealed, 1998, c. 19, s. 115(1)]

    • (b) in respect of any disposition described in subsection 84.1(1) by a taxpayer of shares of the capital stock of a subject corporation to a purchaser corporation, the taxpayer shall, for greater certainty, be deemed not to deal at arm’s length with the purchaser corporation if the taxpayer

      • (i) was, immediately before the disposition, one of a group of fewer than 6 persons that controlled the subject corporation, and

      • (ii) was, immediately after the disposition, one of a group of fewer than 6 persons that controlled the purchaser corporation, each member of which was a member of the group referred to in subparagraph 84.1(2)(b)(i);

    • (c) [Repealed, 1998, c. 19, s. 115(2)]

    • (d) a trust and a beneficiary of the trust or a person related to a beneficiary of the trust shall be deemed not to deal with each other at arm’s length; and

    • (e) if the subject shares are qualified small business corporation shares or shares of the capital stock of a family farm or fishing corporation within the meaning of subsection 110.6(1), the taxpayer and the purchaser corporation are deemed to be dealing at arm’s length if the purchaser corporation is controlled by one or more children or grandchildren of the taxpayer who are 18 years of age or older and if the purchaser corporation does not dispose of the subject shares within 60 months of their purchase.

  • Marginal note:Rules for par. 84.1(2)(a.1)

    (2.01) For the purpose of paragraph 84.1(2)(a.1),

    • (a) where at any time a corporation issues a share of its capital stock to a taxpayer, the taxpayer and the corporation are deemed not to be dealing with each other at arm’s length at that time;

    • (b) where a taxpayer is deemed by paragraph 110.6(19)(a) to have reacquired a share, the taxpayer is deemed to have acquired the share at the beginning of February 23, 1994 from a person with whom the taxpayer was not dealing at arm’s length; and

    • (c) where a share owned by a particular person, or a share substituted for that share, has by one or more transactions or events between persons not dealing at arm’s length become vested in another person, the particular person and the other person are deemed at all times not to be dealing at arm’s length with each other whether or not the particular person and the other person coexisted.

  • Marginal note:Idem

    (2.1) For the purposes of subparagraph 84.1(2)(a.1)(ii), where the taxpayer or an individual with whom the taxpayer did not deal at arm’s length (in this subsection referred to as the “transferor”) disposes of a share in a taxation year and claims an amount under subparagraph 40(1)(a)(iii) in computing the gain for the year from the disposition, the amount in respect of which a deduction under section 110.6 was claimed in respect of the transferor’s gain from the disposition shall be deemed to be equal to the lesser of

    • (a) the total of

      • (i) the amount claimed under subparagraph 40(1)(a)(iii) by the transferor for the year in respect of the disposition, and

      • (ii) twice the amount deducted under section 110.6 in computing the taxable income of the transferor for the year in respect of the taxable capital gain from the disposition, and

    • (b) twice the maximum amount that could have been deducted under section 110.6 in computing the taxable income of the transferor for the year in respect of the taxable capital gain from the disposition if

      • (i) no amount had been claimed by the transferor under subparagraph 40(1)(a)(iii) in computing the gain for the year from the disposition, and

      • (ii) all amounts deducted under section 110.6 in computing the taxable income of the transferor for the year in respect of taxable capital gains from dispositions of property to which this subsection does not apply were deducted before determining the maximum amount that could have been deducted under section 110.6 in respect of the taxable capital gain from the disposition,

      and for the purposes of subparagraph 84.1(2.1)(b)(ii), 1/2 of the total of all amounts determined under this subsection for the year in respect of other property disposed of before the disposition of the share shall be deemed to have been deducted under section 110.6 in computing the taxable income of the transferor for the year in respect of the taxable capital gain from the disposition of property to which this subsection does not apply,

    and, for the purposes of this subsection, where more than one share to which this subsection applies is disposed of in the year, each such share shall be deemed to have been separately disposed of in the order designated by the taxpayer in the taxpayer’s return of income under this Part for the year.

  • Marginal note:Rules for par. 84.1(2)(b)

    (2.2) For the purpose of paragraph 84.1(2)(b),

    • (a) in determining whether or not a taxpayer referred to in that paragraph was a member of a group of fewer than 6 persons that controlled a corporation at any time, any shares of the capital stock of that corporation owned at that time by

      • (i) the taxpayer’s child (as defined in subsection 70(10)), who is under 18 years of age, or the taxpayer’s spouse or common-law partner,

      • (ii) a trust of which the taxpayer, a person described in subparagraph 84.1(2.2)(a)(i) or a corporation described in subparagraph 84.1(2.2)(a)(iii), is a beneficiary, or

      • (iii) a corporation controlled by the taxpayer, by a person described in subparagraph 84.1(2.2)(a)(i) or 84.1(2.2)(a)(ii) or by any combination of those persons or trusts

      are deemed to be owned at that time by the taxpayer and not by the person who actually owned the shares at that time;

    • (b) a group of persons in respect of a corporation means any 2 or more persons each of whom owns shares of the capital stock of the corporation;

    • (c) a corporation that is controlled by one or more members of a particular group of persons in respect of that corporation is considered to be controlled by that group of persons; and

    • (d) a corporation may be controlled by a person or a particular group of persons even though the corporation is also controlled or deemed to be controlled by another person or group of persons.

  • Marginal note:Rules for paragraph 84.1(2)(e)

    (2.3) For the purposes of paragraph (2)(e),

    • (a) if, otherwise than by reason of death, the purchaser corporation disposes of the subject shares within 60 months of their purchase:

      • (i) paragraph (2)(e) is deemed never to have applied,

      • (ii) the taxpayer is deemed, for the purposes of this section, to have disposed of the subject shares to the person who acquired them from the purchaser corporation, and

      • (iii) the period of 60 months applicable to the operation that is deemed to have taken place under subparagraph (ii) is deemed to have begun when the taxpayer disposed of the subject shares to the purchaser corporation;

    • (b) the deduction referred to in subsection 110.6(2) or (2.1) is, for a particular taxation year, the amount, if any, by which that deduction exceeds the amount determined by the formula:

      A × B / $11,250

      where

      A
      is the amount that would, but for this subsection, be the capital gains deduction referred to in subsection 110.6(2) or (2.1) for the particular taxation year; and
      B
      is the amount determined by the formula

      0.00225 × (D - $10 million)

      where

      D
      is
      • (a) if, in both the particular taxation year and the preceding taxation year, the corporation is not associated with any corporation, the taxable capital employed in Canada (within the meaning assigned by subsection 181.2(1) or 181.3(1) or section 181.4, as the case may be) of the corporation for the preceding taxation year,

      • (b) if, in the particular taxation year, the corporation is not associated with any corporation but was associated with one or more corporations in the preceding taxation year, the taxable capital employed in Canada (within the meaning assigned by subsection 181.2(1) or 181.3(1) or section 181.4, as the case may be) of the corporation for the particular taxation year, or

      • (c) if, in the particular taxation year, the corporation is associated with one or more particular corporations, the total of all amounts each of which is the taxable capital employed in Canada (within the meaning assigned by subsection 181.2(1) or 181.3(1) or section 181.4, as the case may be) of the corporation or of any of the particular corporations for its last taxation year that ended in the preceding calendar year; and

    • (c) the taxpayer must provide the Minister with an independent assessment of the fair market value of the subject shares and an affidavit signed by the taxpayer and by a third party attesting to the disposal of the shares.

  • Marginal note:Addition to paid-up capital

    (3) In computing the paid-up capital at any time after May 22, 1985 in respect of any class of shares of the capital stock of a corporation, there shall be added an amount equal to the lesser of

    • (a) the amount, if any, by which

      • (i) the total of all amounts each of which is an amount deemed by subsection 84(3), 84(4) or 84(4.1) to be a dividend on shares of the class paid after May 22, 1985 and before that time by the corporation

      exceeds

      • (ii) the total of such dividends that would be determined under subparagraph 84.1(3)(a)(i) if this Act were read without reference to paragraph 84.1(1)(a), and

    • (b) the total of all amounts required by paragraph 84.1(1)(a) to be deducted in computing the paid-up capital in respect of that class of shares after May 22, 1985 and before that time.

  • [NOTE: Application provisions are not included in the consolidated text
  • see relevant amending Acts and regulations.]
  • R.S., 1985, c. 1 (5th Supp.), s. 84.1
  • 1994, c. 7, Sch. II, s. 63, Sch. VIII, s. 34
  • 1998, c. 19, s. 115
  • 2000, c. 12, s. 142
  • 2001, c. 17, s. 61
  • 2021, c. 21, s. 2

Marginal note:Computation of paid-up capital in respect of particular class of shares

  •  (1) In computing the paid-up capital in respect of any particular class of shares of the capital stock of a corporation at any particular time after March 31, 1977,

    • (a) there shall be deducted that proportion of the amount, if any, by which the paid-up capital in respect of all of the issued shares of the capital stock of the corporation on April 1, 1977, determined without reference to this section, exceeds the greater of

      • (i) the amount that the paid-up capital limit of the corporation would have been on March 31, 1977 if paragraph 89(1)(d) of the Income Tax Act, chapter 148 of the Revised Statutes of Canada, 1952, as it read at that date, were read without reference to clause 89(1)(d)(iv.1)(F) of that Act and without reference to all subparagraphs of paragraph 89(1)(d) of that Act except subparagraphs 89(1)(d)(iv.1) and (vii) of that Act, and

      • (ii) the paid-up capital limit of the corporation on March 31, 1977,

      that the paid-up capital on April 1, 1977, determined without reference to this section, in respect of the particular class of shares is of the paid-up capital on April 1, 1977, determined without reference to this section, in respect of all of the issued and outstanding shares of the capital stock of the corporation; and

    • (b) there shall be added an amount equal to the lesser of

      • (i) the amount, if any, by which

        • (A) the total of all amounts each of which is an amount deemed by subsection 84(3) or 84(4) to be a dividend on shares of the particular class paid by the corporation after March 31, 1977 and before the particular time

        exceeds

        • (B) the total that would be determined under clause 84.2(1)(b)(i)(A) if this Act were read without reference to paragraph 84.2(1)(a), and

      • (ii) the amount required by paragraph 84.2(1)(a) to be deducted in computing the paid-up capital of shares of the particular class.

  • Marginal note:Debt deficiency

    (2) In computing, after March 31, 1977, the adjusted cost base to an individual of a debt that was owing to the individual by a corporation on March 31, 1977, there shall be deducted the amount of any dividend that would have been deemed to have been received by the individual on that day if the corporation had paid the debt in full on that day.

  • Marginal note:Idem

    (3) Where, after March 31, 1977 and before 1979, any debt referred to in subsection 84.2(2) owing by a corporation and held by an individual on March 31, 1977 and continuously after that date until conversion, is converted into shares of a particular class of the capital stock of the corporation,

    • (a) subsection 84.2(2) shall not apply in respect of the debt; and

    • (b) in computing the paid-up capital in respect of the shares of the particular class at any particular time after the conversion,

      • (i) there shall be deducted the amount by which the adjusted cost base to the taxpayer of the debt would, but for paragraph 84.2(3)(a), have been reduced by virtue of subsection 84.2(2), and

      • (ii) there shall be added an amount equal to the lesser of

        • (A) the amount, if any, by which

          • (I) the total of all amounts deemed by subsection 84(3), 84(4) or 84(4.1) to be a dividend on shares of the particular class paid by the corporation after the conversion and before the particular time,

          exceeds

          • (II) the total that would be determined under subclause 84.2(3)(b)(ii)(A)(I) if this Act were read without reference to subparagraph 84.2(3)(b)(i), and

        • (B) the amount required by subparagraph 84.2(3)(b)(i) to be deducted in computing the paid-up capital of shares of the particular class.

  • [NOTE: Application provisions are not included in the consolidated text
  • see relevant amending Acts and regulations.]
  • 1974-75-76, c. 26, s. 47
  • 1977-78, c. 1, s. 39, c. 32, s. 20
 
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