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:
Aco controls Bco and Bco controls Cco. Individual D owns all of the non-voting shares of Cco ("Cco shares"). Individual D is not related to Aco, Bco or Cco. Where individual D sells ("sale") her Cco shares to Aco for cash consideration and Aco then gifts those Cco shares to Cco, whether subsection 84.1(1) will apply to deem Aco to have paid a dividend to individual D.
Position:
Subsection 84.1(1) may apply.
Reasons:
Aco may be considered not to be dealing at arm's length with individual D with respect to the sale.
2003-004910
XXXXXXXXXX Daniel Wong
(613) 954-4949
December 30, 2003
Dear XXXXXXXXXX:
Re: Technical Interpretation Request of November 17, 2003: Gift of shares to a corporation
This is in reply to the above-captioned request wherein you described the following facts. Aco, Bco and Cco are taxable Canadian corporations (as defined in subsection 89(1) of the Income Tax Act ("Act")) and are governed by the Ontario Business Corporations Act ("OBCA"). Aco owns all of the shares of Bco. Bco in turn owns all of the voting shares of Cco while an individual D owns all of the non-voting shares of Cco. The Cco non-voting shares are capital property to Individual D and they are "qualified small business corporation shares" (as defined in subsection 110.6(1) of the Act). Individual D has never claimed any capital gain exemption. Individual D is not related to Aco, Bco or Cco.
Individual D will sell ("sale") her non-voting Cco shares to Aco for cash consideration. Aco will then gift its non-voting Cco shares ("share gift") to Cco. You stated that pursuant to section 33 of the OBCA, Cco could accept its own shares gifted to it by Aco. You queried as to whether the share gift would result in any adverse tax consequences to Aco, Cco or individual D.
In your letter, you outlined what appears to be an actual fact situation related to transactions and events that have taken place. The review of such situations is generally the responsibility of the local taxation services offices and, as outlined in paragraph 22 of Information Circular 70-6R5, it is not our practice to provide specific opinions on factual situations otherwise than in the context of an advance income tax ruling. In any event, a request cannot be considered for a ruling when the transactions are completed or where the issues involved are primarily questions of fact. Nevertheless, we are prepared to provide the following comments that we hope will be of assistance to you.
In our view, Aco will be deemed to have received proceeds of disposition equal to the fair market value of its Cco shares when it gifts those shares to Cco, pursuant to paragraph 69(1)(b). However, Cco will not be deemed to have paid a dividend to Aco under subsection 84(3), as Cco will not pay any consideration to Aco with respect to the share gift. If Aco incurs a loss with respect to the share gift to Cco, that loss will be denied under subsection 40(3.6), as Aco and Cco are affiliated persons, pursuant to subparagraph 251.1(1)(b)(i), immediately after the share gift.
In the present case, it is also our view that Aco may be considered not to be dealing at arm's length with individual D with respect to the sale. Consequently, subsection 84.1(1) may apply to deem Aco to have paid a dividend to individual D.
The above comments represent our general views with respect to the subject matter of your letter and are provided in accordance with paragraph 22 of Information Circular 70-6R5.
Yours truly,
David Palamar
Corporate Reorganizations Section III Manager
for Division Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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