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 CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues: The tax consequences of redemption of preferred shares
Position: Subsection 84.1(1) will be applicable and will limit the PUC. 84.1Consequently, there will be a deemed dividend on the redemption.
Reasons: Application of 84.1
XXXXXXXXXX 2001-009817
F. Francis
October 30, 2001
Dear XXXXXXXXXX:
This is in reply to your letter of August 20, 2001, wherein you requested our views on the tax consequences of the following hypothetical situation:
- Individual A transfers 50 common shares of Opco Inc, a small business corporation as defined under subsection 248(1) of the Income Tax Act (the "Act"), to Holdco Inc. Individual A does not deal at arm's length with Holdco Inc.
- The common shares have a paid-up capital of $50, an adjusted cost base of $50 and a fair market value of $475,000.
- Individual A and Holdco Inc. file an election under subsection 85(1) of the Act and use an elected amount equal to $475,000. Individual A receives 475 Class A Preferred Shares redeemable at $1,000 per share.
You enquire as to the tax consequences of a subsequent redemption of the 475 Class A Preferred Shares.
Where an individual resident in Canada disposes of shares that are capital property of any class of the capital stock of a corporation resident in Canada (the "subject corporation") to another corporation (the "purchaser corporation") with which he does not deal at arm's length, and immediately after the disposition the subject corporation would be connected with the purchaser corporation, the provisions of subsection 84.1(1) of the Act will apply to limit the paid-up capital of the new shares received by the individual. In this situation, the paid-up capital of the Class A Preferred Shares would be deemed to be $50. Consequently, a subsequent redemption of the Class A Preferred Shares would result in a deemed dividend to Individual A, by virtue of subsection 84(3) of the Act.
As noted in Information Circular 70-6R4, issued on January 29, 2001, these comments are not binding on the Canada Customs and Revenue Agency.
Yours truly,
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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