28 February 2000 External T.I. 1999-0009305 - Winding-up, 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: Based on situation, there were no contentious issues.

Position:

Reasons:

XXXXXXXXXX 1999-000930
D. Yuen
Attention: XXXXXXXXXX

February 28, 2000

Dear Sirs:

Re: Subparagraph 88(1)(d)(i.1) of the Income Tax Act¹

We are writing in response to your letter of August 31, 1999 wherein you requested a technical interpretation in respect of the following situation which was described in the Department of Finance Technical Notes that accompanied the draft amendments enacted by S.C. 1998, c. 19.

Situation

"Safe Income Crystallization

Example 1...

Assume Sco, a taxable Canadian corporation, owns 15 per cent of Tco, a publicly- traded taxable Canadian corporation. Pco makes a takeover offer for all the shares of Tco. In anticipation of the sale of shares of Tco, Sco incorporates Newco and transfers on a tax-deferred basis under section 85 of the Act all of its Tco shares to Newco in exchange for Newco shares. The adjusted cost base and the paid-up capital of the Newco shares are increased by an amount equal to the so-called "safe income" attributable to the Tco shares that Sco had at the time of the transfer. Sco sells the Newco shares to Pco and receives cash. Pco intends to wind up Newco and to step up the cost of the capital property (the Tco shares) distributed to it on the winding-up of Newco, as provided for under paragraph 88(1)(c) of the Act."

You have asked us to assume that instead of winding-up Newco into Pco directly, Pco incorporates a wholly-owned subsidiary ("Holdco") and transfers all of its Newco shares to Holdco in exchange for Holdco shares. Immediately after the transfer, Newco is wound up into Holdco. Holdco intends to step up the cost base of the capital property distributed to it on the winding-up of Newco.

You wish to know whether the dividend that is deemed by subsection 84(1) to have been received by Sco on the increase in paid-up capital of the Newco shares is a dividend described in subparagraph 88(1)(d)(i.1), as a result of the application of subsection 88(1.7).

Our Comments

1. Provided that Holdco and Sco deal with each other at arm's length, the provisions of subparagraph 88(1)(d)(i.1) would not appear to apply to the dividends that are deemed by subsection 84(1) to be paid by Newco to Sco as a result of the increase in stated capital (and paid-up capital) described above.

2. Subsection 88(1.7) applies where a parent does not deal at arm's length with another person. Provided Holdco (the parent) deals at arm's length with Sco (the other person), this provision would not appear to be applicable since its application depends on the parties being non-arm's-length at any time, which does not appear to be the case in this situation.

3. The increase in the cost base of the capital property owned by Newco on the winding-up pursuant to paragraphs 88(1)(c) and (d) may be restricted by other provisions of subsection 88(1) which may become applicable if Holdco subsequently disposes of the capital property in certain circumstances (see for example, subparagraph 88(1)(c)(vi)).

These comments are provided in accordance with the guidelines set out in paragraph 22 of Information Circular IC-70-6R3 dated December 30, 1996 issued by Revenue Canada and are not considered binding on the Canada Customs and Revenue Agency.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings Directorate
Policy and Legislation Branch

1 All statutory references contained in this letter are to the Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1, as amended hereof, except as otherwise indicated.

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