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:
Do new provisions of 55(3)(a) apply where arm's length parties own a company?
Position TAKEN:
yes.
Reasons FOR POSITION TAKEN:
New provisions introduce a "related to" test rather than an "arm's length test".
5-950022
XXXXXXXXXX D. Yuen
Attention: XXXXXXXXXX
February 2, 1995
Dear Sirs:
Re: Paragraph 55(3)(a) of the Income Tax Act1
We are writing in response to your letter of December 6, 1994 which was forwarded to us by the Calgary District Taxation Office. You have requested our views on whether paragraph 55(3)(a) would apply to deny the application of subsection 55(2) in the following situation.
Situation
Individuals "A" and "B" are not related and each owns a 50% interest in Opco.
A and B wish to transfer the land and buildings of Opco to another company to isolate those assets from future potential creditors.
A and B will each subscribe for 50% of the common shares of Newco and each will then transfer an equal number of common shares of Opco to Newco in exchange for common shares of Newco. The aggregate fair market value of the common shares of Opco so transferred will be equal to the fair market value of the land and buildings of Opco to be transferred to Newco.
Opco will transfer the land and buildings to Newco in exchange for preferred shares of Newco having an aggregate redemption value equal to the fair market value of the land and buildings so transferred. An election under subsection 85(1) will be filed in respect of the transfer.
Opco will purchase for cancellation, at fair market value, its common shares held by Newco in exchange for a note. Newco will redeem, at their redemption value, all of its preferred shares held by Opco in exchange for a note. The notes will be offset.
Our Comments
Bill C-59 which was introduced in the House of Commons on November 24, 1994 proposes that the provisions of paragraph 55(3)(a) be revised to provide for a "related to" test rather than an "arm's length" test. It is therefore our view that, in the situation described, the provisions of proposed paragraph 55(3)(a) will not apply since A and B, who increase their interest in Newco, will not be related to either Opco or Newco, the dividend recipients.
The foregoing comments are given in accordance with the practice referred to in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990 and are not binding on Revenue Canada.
Yours truly,
for Director
Reorganizations and Foreign Division
Rulings Directorate
Policy and Legislation Branch
1 All statutory references in this letter are to the Income Tax Act (Canada) R.S.C. 1985 (5th Supp.) c.61, as amended.
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