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: Shares redeemed- application of 84(3)
Position TAKEN: 84(3) applies
REASON FOR POSITION TAKEN: Wording of 84(3)
XXXXXXXXXX 2002-014999
C. Tremblay, CMA
September 5, 2002
Dear XXXXXXXXXX,
Re: Redemption of XXXXXXXXXX Preferred Shares
This is in reply to your letter of June 26, 2002, wherein you ask us the correct method of reporting your preferred shares redeemed in 2002 for tax purposes.
It appears that this situation relates to a factual situation and a completed transaction, accordingly, it should be submitted to the appropriate taxation services office for their consideration. Our comments will, therefore, be of a general nature.
The provisions of subsection 84(3) of the Income Tax Act (the "Act") apply to any situation where a corporation resident in Canada has redeemed, acquired or cancelled any of the shares of any class of its capital stock. The corporation is deemed to have paid and the shareholder is deemed to have received a dividend equal to the amount by which the amount paid by the corporation on the redemption of a share exceeds the paid-up capital in respect of the particular share. "Paid-up capital" has the meaning assigned by subsection 89(1) of the Act.
If the shareholder is an individual described in paragraph 82(1)(b) of the Act, an additional amount equal to 1/4 of the deemed dividend will be included in computing the income of the shareholder. Such shareholder will be entitled to a dividend tax credit in respect thereof in determining his or her tax payable.
As per paragraph (j) of the definition of "proceeds of disposition" in section 54 of the Act, the proceeds of disposition for those shares to the shareholder will be deemed to be the amount received from the corporation less the amount deemed by subsection 84(3) of the Act to be a dividend received.
The shareholder would realize a capital loss from the disposition of the shares if the adjusted cost base of the shares exceeds the proceeds of disposition.
Accordingly, based on the information you supplied, we confirm that the corporation is correct in advising that there is a deemed dividend resulting from the share redemption.
The foregoing comments represent an opinion expressing our general views with respect to the subject matter. As indicated in paragraph 22 of Information Circular 70-6R5, the above comments do not constitute an advance income tax ruling and, accordingly, are not binding on the Canada Customs and Revenue Agency.
We trust our comments will be of assistance.
Yours truly,
Steve Tevlin
For Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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