Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues: Are former spouses dealing with each at arm's length for the purpose of section 84.1 where a share purchase agreement has been entered into as part of the divorce settlement before the divorce is final.
Position: Question of fact - must also consider the application of subsection 84.1(2.01).
Reasons: See above.
XXXXXXXXXX 1999-000862
Attention: XXXXXXXXXX
February 1, 2000
Dear Sirs:
Re: Application of Section 84.1
We are writing in response to your letter of August 30, 1999 wherein you requested our views on the application of section 84.1 of the Income Tax Act (the "Act") in the following situation.
A taxpayer ("Mr. A") and his spouse ("Mrs. A") are in the process of being divorced. Mr. and Mrs. A each own 50% of the shares of a Canadian-controlled private corporation ("Aco"), which is a "qualified small business corporation" as that term is defined in subsection 110.6(1) of the Act. As part of the divorce settlement Mr. and Mrs. A have negotiated an "option agreement" under which Mr. A will be required to buy all of Mrs. A's shares of Aco after they are divorced for a cash price that is presumably equal to the fair market value of the Aco shares owned by Mrs. A.
Once the divorce is finalized Mrs. A will sell her Aco shares for the agreed price and claim a capital gain exemption in respect thereof. Sometime thereafter it is expected that Mr. A will transfer all his Aco shares to another corporation resident in Canada ("Bco") owned by him taking back non-share consideration equal to his adjusted cost base ("ACB") of the Aco shares and shares of Bco such that the total amount of consideration Mr. A receives from Bco will equal the fair market value of the Aco shares so transferred.
Your question is whether paragraph 84.1(1)(b) of the Act would operate to deem a dividend to be paid to Mr. A because Mr. A's ACB under E of that paragraph would be reduced by the amount of Mrs. A's capital gains exemption claimed on the sale of the Aco shares to Mr. A.
Your request appears to relate to either a proposed transaction or a completed transaction. Confirmation of the income tax consequences of proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. To make such a request the advance income tax ruling must be submitted in accordance with the guidelines set out in Information Circular 70-6R3 (IC-70-6R3) dated December 30, 1996. However, if the situation relates to a completed transaction a request for the Canada Customs and Revenue Agency's views must be made to your local Tax Services Office. Although we are not able to comment specifically on the situation described in your letter we can offer the following comments.
It is a question of fact whether two persons are dealing at arm's length for the purposes of section 84.1 of the Act. Although, subsequent to a divorce former spouses would no longer be related persons and one would generally expect that after that time they would be dealing at arm's length for purposes of the Act, this may not always be the case. For example, where there is a pre-ordained series of transactions or events that commence prior to the divorce being finalized, the taxpayers may not necessarily be dealing with each other at arm's length. Moreover, one has to consider whether subsection 84.1(2.01) would apply to deem such persons not to be dealing at arm's length.
Under paragraph 84.1(2.01)(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 not to be dealing at arm's length with each other whether or not the particular person and the other person coexisted.
Our comments are provided in accordance with the practice described in paragraph 22 of IC-70-6R3.
Yours truly,
for Director
Reorganizations and International Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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