ARCHIVED - Dispositions - Absence of Consideration
DATE: October 6, 1980
SUBJECT: INCOME TAX ACT
Dispositions - Absence of Consideration
REFERENCE: Paragraphs 13(21)(c) and 54(c) (also paragraphs 13(21)(d) and 54(h))
1. A disposition can generally be regarded as an event or transaction where possession, control and all other aspects of property ownership are relinquished. Although there is usually a corresponding acquisition of the property by another person and consideration flowing to the person disposing of the property, it is the Department's view that neither of these characteristics need always be present for the purposes of paragraphs 13(21)(c) and 54(c). It is clear that there need not be a corresponding acquisition of property in all cases when a person disposing of property is entitled to receive proceeds as described in paragraphs 13(21)(d) and 54(h), but the application of the law is less certain when no proceeds are involved.
2. Where the Department is satisfied that a disposition has taken place under the general meaning of the term as described in 1 above and there are no actual or deemed proceeds involved, an amount of zero may be used as proceeds of disposition in subparagraph 40(1)(b)(i) for purposes of computing a loss from the disposition.
3. The following are examples of events that the Department considers to be dispositions even though no actual proceeds are involved:
(a) a capital property is stolen or destroyed and there is no entitlement or right to compensation (insurance proceeds, salvage, etc.) and none is forthcoming;
(b) a capital property is lost or abandoned and beyond reasonable expectation of recovery;
(c) a corporation, in which a taxpayer holds shares of a particular class as a capital property, surrenders (or has cancelled or withdrawn) its articles of incorporation and there are no assets to which the shareholders of that class are or could become entitled (but see 6 below);
(d) a capital property is confiscated or expropriated without compensation by a government;
(e) a partnership, in which a taxpayer has a partnership interest (a capital property), is dissolved and the taxpayer is not entitled to and does not receive any share of the partnership's net assets (if any);
(f) a capital property is transferred by way of gift or donation.
4. The following occurrences do not constitute a disposition (within the meaning of paragraph 54(c)) of a share of a corporation:
(a) the corporation's shares are delisted from a stock exchange,
(b) a regulatory authority issues a "cease trading" order in respect of the corporation's shares,
(c) the corporation goes into receivership (but see 5 below), or
(d) the corporation becomes bankrupt (but see 5 below).
5. For 1978 and subsequent taxation years, a shareholder of a corporation that has become bankrupt (including a corporation against which a receiving order has been issued by a Court) during a particular taxation year is deemed by subsection 50(1) to have disposed of his shareholdings for no proceeds at the end of that year (unless the shares were acquired as consideration for the disposition of personal-use property).
6. Corporate legislation in various jurisdictions frequently provides for the restoration of corporations that have previously been formally dissolved, as in 3(c) above. Such a restoration will not nullify the disposition of a class of shares by its shareholders that took place upon dissolution provided that
(a) the corporation had no assets at the time of dissolution to which the shareholders of that particular class of shares were or could have become entitled, and
(b) there was no reason to believe at the time of dissolution that the corporation would be restored.
In other cases a careful examination of the applicable facts is necessary to establish that a bona fide disposition did occur upon dissolution.
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