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

1 Subparagraph 55(5)(e)(i) of the Income Tax Act is replaced by the following:

• 2 (1) Subsection 84.1(2) of the Act is amended by striking out “and” at the end of paragraph (b), by adding “and” at the end of paragraph (d), and by adding the following after paragraph (d):

  • (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.

• (2) Section 84.1 of the Act is amended by adding the following after subsection (2.2):

  • 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.