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:
Taxpayer sells shares of Holdco, which owns 100% of common and preferred shares of Opco. Preferred shares of Opco are not prescribed shares and have not paid dividends.
Does 110.6(8) apply to deny the capital gains exemption in respect of the taxpayer's capital gain on the disposition of the shares of Holdco?
Position TAKEN:
Question of fact, but based on information provided, subsection 110.6(8) likely would not apply.
Reasons FOR POSITION TAKEN:
Payment of dividends from Opco to Holdco does not affect value of Holdco's shares. Therefore, no part of the capital gain on disposition can be attributable to the non-payment of dividends .
XXXXXXXXXX 2000-001208
T. Young
May 29, 2000
Dear XXXXXXXXXX
Re: Subsection 110.6(8) of the Income Tax Act
This is in reply to your letter of March 6, 2000, in which you requested our comments regarding the application of subsection 110.6(8) of the Income Tax Act (the "Act") in the following hypothetical situation.
Mr. A owns 9 common shares of a holding company ("Holdco"); Mrs. A owns the remaining common share. There are no other shares of Holdco outstanding. Holdco owns 100% of the issued and outstanding common and preferred shares of an operating company ("Opco"). The common shares of Holdco and Opco are prescribed shares pursuant to section 6205 of the Income Tax Regulations. The preferred shares of Opco are not prescribed shares. Market rate dividends in accordance with subsections 110.6(8) and 110.6(9) of the Act have not been paid by Opco to Holdco on the preferred shares.
Your inquiry is whether subsection 110.6(8) of the Act would apply on the disposition of the shares in Holdco by Mr. A or Mrs. A.
Written confirmation of the tax implications inherent in particular transactions is given by this directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R3, dated December 30, 1996. However, we are prepared to offer the following general comments.
Subsections 110.6(8) and (9) of the Act are anti-avoidance rules enacted to prevent the conversion of dividend income into exempt capital gains of individuals. Subsection 110.6(8) of the Act applies to deny a capital gain deduction where a significant part of the capital gain is attributable to the fact that dividends were not paid on a share (other than a prescribed share) of a corporation or that dividends paid on such a share in a year or in a preceding taxation year were less than 90% of the average annual rate of return thereon for that year.
Whether it can reasonably be concluded that a significant part of a capital gain is attributable to the non-payment of dividends is a question of fact which can only be determined upon a complete review of all of the relevant circumstances surrounding a particular capital gain.
In the situation you have described, we would generally expect, as you stated in your letter, that it would not be reasonable to consider that a significant part of the capital gain realized on the disposition of Holdco shares is attributable to the fact that dividends were not paid on the Opco preferred shares. In other words, the gain on the Holdco shares will be attributable to both retained earnings and unrealized gains on underlying assets of Holdco. The failure by Opco to pay dividends on its preferred shares would increase the unrealized gain on the Opco common shares but at the same time, reduce what would have been Holdco's retained earnings, thus having a nil effect on the value of the Holdco common shares. Accordingly, subsection 110.6(8) would not apply.
I trust our comments will be of assistance to you.
Yours truly,
J. Wilson
for Director
Business and Publications Division
Income Tax Rulings Directorate
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