Principal Issues: A Canadian-controlled private corporation ("Holdco") owns all of the voting and participating shares of the capital stock of another Canadian-controlled private corporation ("Subco"). At one point in time, Holdco also owned more than 50% of the voting shares of the capital stock of a public corporation ("Pubco"). Pubco owns preferred shares of the capital stock of Subco (the "Subco Preferred Shares"). The Subco Preferred Shares were issued as consideration for the transfer of assets by Pubco in favour of Subco on a rollover basis. The Subco Preferred Shares are retractable for an amount equal to the fair market value ("FMV") of the consideration received by Subco upon the issuance of the shares, plus a premium to be established in function of various parameters (the "Premium"). The purchase agreement between Pubco and Subco contains a price adjustment clause. Initially, Subco and Pubco determine the FMV of the transferred assets to be $2 M. Afterwards, the price adjustment clause operates and the FMV of the transferred assets and the Subco Preferred Shares is reduced by $1 M. As a result of various transactions, Holdco ends up losing control of Pubco. After this loss of control of Pubco, the Subco Preferred Shares are redeemed. Question a): Whether the Part IV.1 tax or the Part VI.1 tax would apply with respect to the redemption of the Subco Preferred Shares. Question b): If Part VI.1 tax applies, whether subsection 191(4) would apply in order to deem an amount of $1 M to be an "excluded dividend." Question c): Whether subsection 191(4) would also apply in order to deem an amount equal to the Premium to be an "excluded dividend." Question d): Whether Part VI.1 would apply to any dividends that could be paid on the Subco Preferred Shares. Question e): Whether subsection 55(2) would apply in the circumstances. Question f): What would be the impact of the application of subsection 55(2) with respect to the Part IV.1 and VI.1 taxes.
Position: Answer to Question a): The dividend resulting from the redemption of the Subco Preferred Shares would be an "excepted dividend" as described in paragraph 187.1 (d), provided that such dividend is received on a short term preferred share and is not described in paragraph (b) or (c) of the definition of "excluded dividend" in subsection 191(1). However, assuming that this is the case, Part VI.1 tax would apply to the dividend payer in the circumstances. Answer to Question b): Subsection 191(4) would not apply. The CRA's position is that for the purposes of subsection 191(4), the amount must be expressed in dollars and cannot be subject to a price adjustment clause. Answer to Question c): No. Answer to Question d): Yes. Answer to Question e): Yes. Answer to Question f): Where subsection 55(2) applies, the dividend is deemed not to be a dividend received by the corporation. Subsection 55(2) applies "notwithstanding any other section" of the Act. However, the dividend will still be a dividend from the perspective of the dividend payer. Consequently, Part IV.1, which normally applies with respect to dividends received by a corporation, cannot apply to the amount of the dividend deemed by subsection 55(2) not to be a dividend. However, the provisions of subsection 55(2) have no impact on the potential application of Part VI.1, which applies with respect to dividends paid by a corporation.
Reasons: Wording of the Act and previous positions.
