20 September 2002 External T.I. 2002-0143945 - Subsection 83(2) Meaning of Shareholder83(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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: Whether a person entitled to receive a dividend, but who no longer owns shares at the time the dividend is received, is a "shareholder" for the purposes of subsection 83(2)

Position: Yes

Reasons: Definition of "shareholder" in subsection 248(1) includes a person entitled to receive payment of a dividend

XXXXXXXXXX 2002-014394
Gwen Watson
September 20, 2002

Dear XXXXXXXXXX:

Re: Subsection 83(2)

This is in reply to your letter of May 31, 2002, wherein you requested our views regarding the application of subsection 83(2) of the Income Tax Act (Canada) (the "Act") in the following situation:

1. X, a Canadian resident individual, owns all of the issued and outstanding common shares of Opco, a private corporation.

2. On Day1, the balance of Opco's capital dividend account is zero.

3. On Day1, Opco declares a dividend on the common shares in the amount of $1 million to all the shareholders of record, payable on Day18.

4. Between Day1 and Day15, Opco sells eligible capital property, with the result that $1 million will be included in computing Opco's income pursuant to paragraph 14(1)(b) in the taxation year that ends after the date of disposition.

5. On Day15, X sells all the common shares of Opco that he owns to Y, an unrelated third party. As a result, there will be an acquisition of control of Opco and subsection 249(4) will apply to deem Opco to have a year-end immediately before the acquisition of control. Accordingly, for Opco's taxation year ending immediately before the acquisition of control, and by virtue of the disposition of Opco's eligible capital property, $1 million will be included in computing Opco's income under paragraph 14(1)(b) and $1 million will be added to Opco's capital dividend account pursuant to paragraph (c.2) of that definition in subsection 89(1).

6. On Day18, Opco pays the dividend that was declared on Day1 to X, who no longer owns any shares of Opco as of the date the dividend is received.

You query whether Opco will be entitled to file an election under subsection 83(2) with respect to the dividend paid to X on Day18.

Our Comments

The particular situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. As explained in Information Circular 70-6R5, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an Advance Income Tax Ruling. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office for their views. We are, however, prepared to offer the following general comments, which may be of assistance.

Subject to subsection 83(2.1), paragraphs 83(2)(a) and (b) will apply if:

1. A dividend becomes payable by a private corporation;

2. The dividend is payable to shareholders of any class of shares of the corporation's capital stock; and

3. The private corporation elects to have the provisions of subsection 83(2) apply to the full amount of the dividend, within the time provided in subsection 83(2) and in the prescribed manner and form.

The condition in paragraph 2 will only be satisfied if X is a "shareholder" as of the date the dividend becomes payable on Day18. The term "shareholder" is defined in subsection 248(1) of the Act to include "a member or other person entitled to receive payment of a dividend". Even though X no longer owns any shares on Day18, X is entitled to receive payment of the dividend declared on Day1 by virtue of being the shareholder of record on Day1. Accordingly, we are of the view that X would be considered to be a shareholder of Opco on Day18 for the purposes of subsection 83(2). Provided Opco elects to have the provisions of subsection 83(2) apply to the $1 million dividend within the time provided, and in the prescribed manner and form, paragraphs 83(2)(a) and (b) will apply.

We trust that our comments will be of assistance to you. However, as stated in paragraph 22 of Information Circular 70-6R5, the opinion expressed in this letter is not a ruling and consequently is not binding on the CCRA.

Yours truly,

Mark Symes
Section Manager
for Division Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch