SUBJECT :   INCOME TAX ACT
            Transfer of Property to a Corporation under Subsection 85(1)


NO:   IT-291R2

DATE:       September 16, 1994

REFERENCE:  Subsection 85(1) (also sections 22 and 85.1, subsections
            15(1), 28(1), 66(5), 85(1.1), (2.1), (4), (5) and (5.1),
            89(1), 138(12)  and 256(5.1), and paragraphs 20(1)(l) and
            (p), 24(1)(a), 53(1)(c) and 66(15)(c))



1. The rules in subsection 85(1) enable a taxpayer (the transferor) to
dispose of "eligible property" (see 4 below) to a taxable Canadian
corporation (the transferee), as explained in 3 below, so that most, if
not all, of the tax consequences which usually arise on such a
disposition are shifted to the corporation from the taxpayer. The
transferor is permitted to dispose of the property to the transferee for
an "agreed amount" which may be other than the fair market value of
either such property or the consideration received for it. This "agreed
amount", which is subject to the limitations explained in 9 through 13
and 19 below, generally becomes the proceeds of disposition of the
property to the transferor and the cost to the transferee. It also
establishes the cost of the consideration receivable by the transferor
from the transferee in return for the property transferred to the
transferee (see 21 below). Subsection 85(1) will apply in any case where

 (a)   the property disposed of is "eligible property" described in
       subsection 85(1.1) (see 4 below),

 (b)   the transferor and the transferee make a valid joint election in
       the form authorized by the Minister (T2057) to invoke the
       provisions of subsection 85(1) (see 31 below),

 (c)   the consideration received by the transferor for the property
       disposed of to the transferee includes at least one share of the
       capital stock of the transferee, and

 (d)   subsection 85(5.1) is not applicable (see 22 below).

Transferor

2. Subsection 85(1) applies to a transferor that is a "taxpayer".
"Taxpayer" is defined in subsection 248(1) to include any person whether
or not liable to pay tax and, accordingly, includes individuals,
corporations, and trusts. (Comments on the transfer of property to a
corporation by a partnership under subsection 85(2) are contained in the
current version of IT-378, Winding-up of a Partnership).
                                                              page 2


Transferee

3. For subsection 85(1) to apply to a disposition of property the
transferee must, at the time of the disposition, be a "taxable Canadian
corporation" as defined in subsection 89(1). Basically this is a
corporation that is a "Canadian corporation" not exempt from Part I tax.
A "Canadian corporation" is defined in subsection 89(1) as being a
corporation that at the relevant time is resident in Canada and was
either incorporated in Canada or resident in Canada throughout the period
commencing June 18, 1971 and ending at that time.

Eligible Property

4. Pursuant to subsection 85(1.1), "eligible property" for the purposes
of subsection 85(1) means:

 (a)   a capital property (other than real property, an interest in real
       property or an option on real property, owned by a non-resident
       person), including

    (i)  depreciable property, whether or not of a prescribed class,
         (however subsection 85(5.1) will preclude the application of
         subsection 85(1) to dispositions of depreciable property of a
         prescribed class in certain instances - see 22 below), and

   (ii)  accounts receivable (other than those on which an election under
         section 22 has been made - see 7 below) where they are being
         transferred along with all or substantially all of the other
         assets relating to a taxpayer's business,

 (b)   a capital property that is real property, an interest in real
       property or an option on real property owned by a non-resident
       insurer where that property and the property received as
       consideration for it are property used by it in the year in, or
       held by it in the year in the course of (within the meaning
       assigned by subsection 138(12)), carrying on an insurance
       business in Canada,

 (c)   a Canadian resource property (see 6 below),

 (d)   a foreign resource property,

 (e)   an eligible capital property,

 (f)   an inventory including work in progress of a professional who has
       elected under paragraph 34(a), but excluding an inventory of real
       property and, for dispositions after December 20, 1991, an
       inventory of interests in and options on real property,

 (g)   a property (other than a capital property or an inventory) that
       is a security or debt obligation used or held by a taxpayer in
       the year in an insurance or money lending business,

 (h)   a capital property that is real property, an interest or an
       option concerning such capital property, owned by a non-resident
       person (other than a non-resident insurer) and used in the year
       in a business carried on by the non-resident person in Canada,
       (see 8 below) or

 (i)   a net income stabilization account (NISA) Fund No. 2, as defined
       in subsection 248(1), for dispositions occurring after 1990.

Please note that the above is only part of the bulletin issued by Revenue Canada.