1 February 2000 External T.I. 1999-0006945 - NON-QUALIFYING SECURITY AND DIVIDEND

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:

1. Whether a gift of a capital interest in a charitable remainder trust would be a "non-qualifying security" as defined in subsection 118.1(18).

2. Whether subsection 129(1.2) would apply to prohibit a corporation from obtaining a dividend refund.

Position:

1. No, but if, having regard to the circumstances, it is determined that the main reason for using a charitable remainder trust is to circumvent the rules in subsection 118.1(13) or (16), consideration will be given to the possible application of GAAR (e.g., where the assets transferred to the trust are themselves non-qualifying securities).

2. Factual determination as to whether one of the main purposes of the transaction or series of transaction was to enable the corporation to obtain a dividend refund.

Reasons:

1. Subsection 118.1(18).

2. The purpose test in subsection 129(1.2).

XXXXXXXXXX 	 	1999-000694

Attention: XXXXXXXXXX

February 1, 2000

Dear Sir:

Re: Non-Qualifying Security and Dividend Refund

This is in reply to your facsimile letter dated September 9, 1999 wherein you requested an interpretation of the provisions of subsections 118.1(18) and 129(2.1) of the Income Tax Act (the "Act").

In your letter, you described a situation where the terms of an individual's will provide for the transfer of the individual's shares of a private taxable Canadian corporation ("Corporation") to a charitable remainder trust on the individual's death. The individual's spouse will be the sole income beneficiary of the trust and on the death of the spouse, the shares in the trust will be transferred to a private foundation, the sole capital beneficiary of the trust. You advise that the individual's will provides that the beneficiaries have no power to encroach on the capital of the trust. After the death of the spouse, the Corporation intends to redeem its shares in the course of winding-up so as to allow the private foundation to access the Corporation's cash for its use.

You have asked for our views as to whether a gift of a capital interest in a trust would be considered a "non-qualifying security" as defined in subsection 118.1(18) of the Act. You have also enquired whether subsection 129(1.2) of the Act would apply to the dividend refund arising as a result of the winding-up of the Corporation.

Your request appears to relate to either proposed or completed transactions involving specific taxpayers and we are unable to consider specific situations in a general letter of opinion. To the extent that you require assistance in determining the tax treatment with regard to a completed transaction, you should contact your local tax services office and provide them with the full particulars of your client's situation. To the extent that you require confirmation of the tax consequences of proposed transactions, you may request an advance income tax ruling in accordance with the guidelines set out in Information Circular 70-6R3. However, we can offer the following comments which we caution may or may not be applicable to your particular fact situation.

Generally, it is our view that a capital interest in a charitable remainder trust is not a security described in any of paragraphs (a) to (c) in the definition of "non-qualifying security" in subsection 118.1(18) of the Act. However, if, having regard to the circumstances, it is determined that the main reason for using a charitable remainder trust is to circumvent the rules in subsection 118.1(13) or (16) of the Act, consideration will be given to the possible application of GAAR (e.g., where the assets transferred to the trust are themselves non-qualifying securities). We note that even if it is established that a gift has been made, it is our view that it is very difficult to determine the value of a capital interest in a trust, the property of which consisted of shares of a private corporation.

With regard to the application of subsection 129(1.2) of the Act, it is an anti-avoidance provision designed to prevent a corporation from structuring its affairs in such a manner that a dividend refund is generated in the payer corporation without the related shareholder tax being paid by the recipient corporation. Accordingly, it is our view that the provisions of subsection 129(1.2) of the Act will apply to a dividend in any situation where "one of the main purposes" of acquiring a share and paying a dividend on that share is to enable a corporation to obtain a dividend refund.

While a review of the specific facts of a particular situation would be required to determine whether or not the purpose test in subsection 129(1.2) of the Act has been met, in our view, the fact that shares are distributed to a charity in satisfaction of its capital interest in a trust on the death of the income beneficiary would not necessarily cause subsection 129(1.2) of the Act to apply.

While we hope that our comments will be of assistance to you, they are given in accordance with the practice referred to in paragraph 22 of IC-70-6R3 and are not binding on the Agency in respect of any particular situation.

Yours truly,

Manager
Financial Institutions Section
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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