10 April 2001 External T.I. 2000-0058935 - shareholder benefits & subs 56(2)

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: Whether subsection 56(2) of the Act will be applied as a consequence of Newco only having to pay $1 for the preferred share issued by Opco 1 that will have a fair market value well in excess of that amount?

Position: Question of fact - but it appears that subsection 15(1) will apply in this particular situation. Also subsection 55(2) may apply to the deemed dividends.

Reasons: The law.

XXXXXXXXXX 2000-005893

April 10, 2001

Dear XXXXXXXXXX :

Re: Indirect Benefits - Subsection 56(2)

This is in reply to your letter dated November 7, 2000, to the London TSO which was forwarded to us for our reply. In your letter you requested the Canada Customs and Revenue Agency's ("CCRA") views on the application of subsection 56(2) of the Income Tax Act (the "Act") to a detailed series of transactions which are part of a corporate restructuring.

Your request appears to relate to either a proposed transaction or a completed transaction. Confirmation of the income tax consequences of proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. To make such a request, the advance income tax ruling must be submitted in accordance with the guidelines set out in Information Circular 70-6R4 (IC-70-6R4) dated January 29, 2001. However, if the situation relates to a completed transaction involving a specific taxpayer a request for the CCRA's views must be made to your local Tax Services Office and the identity of the specific taxpayer(s) must be disclosed. Notwithstanding the above we are prepared to offer the following comments.

In our view, where a corporation issues a share for an amount which is clearly less than its fair market value a benefit would be conferred by the corporation. Subject to the exception provided in paragraph 15(1)(c) and assuming section 7 of the Act does not otherwise apply, the amount of such benefit would normally be taxable under subsection 15(1) of the Act. In circumstances where the corporation's shareholders/ directors have directed the corporation to issue its shares to another person for less than their fair market value subsections 246(1) or 56(2) or paragraph 69(1)(b) may apply. In addition, where such shares are held by a corporation and are subsequently redeemed, the application of subsection 55(2) to any taxable dividend arising on the share redemption must be considered.

Our comments are provided in accordance with the practice described in paragraph 22 of IC-70-6R4.

Yours truly,

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