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.
DEC 21 1988
HEAD OFFICE Specialty Rulings Directorate S. Shinerock (613) 957-2108
SUBJECT: Letter dated September 22, 1988 from XXXX Determination of subsection 84(3) dividend
We refer to your memorandum of September 30, 1988, with which you enclosed a letter dated September 22, 1988 from the Vancouver office of XXXX. This letter requested your assistance on the proper disclosure of a dividend that was deemed to have been paid pursuant to paragraph 84(3){a) of the Income Tax Act (the "Act") by a client of XXXX. You have requested us to reply to XXXX directly.
We regret that we are unable to respond directly to XXXX on the matter described in their letter, which pertains to the correct amount to be reported by XXXX in preparing and submitting its T5 summary and supplementary in respect of the 1988 calendar year. In general, we do not express opinions on completed transactions unless we believe the circumstances are appropriate, as indicated in paragraph 22 of Information Circular 70-6R dated December 18, 1978. In this case, we do not think that the circumstances are appropriate, since there are questions of fact which remain to be determined, and which underlie the purchase agreement between XXXX and XXXX, a copy of which was attached to your memorandum, pursuant to which XXXX acquired XXXX of XXXX which acquisition has apparently given rise to the subsection 84(3) dividend. Furthermore, we believe that XXXX, having all the facts at its disposal, is in a better position than the Department to determine the amount of the dividend to be reported by XXXX or the 1988 calendar year. Once they have done this, your office can then review the amount reported and the reasons given to support it, and may, if you are at that time so inclined, request our opinion on the matter.
We suggest that you convey the substance of our statements above to XXXX. The comments which follow are intended to assist you in evaluating the method used by XXXX in reporting the subsection 84(3) dividend. Our comments are based on the following understanding of the facts:
1. XXXX
2. XXXX
3. XXXX
4. XXXX
5. XXXX
6. XXXX
7. XXXX
Comments
The following comments pertain only to the sale by XXXX to XXXX of the XXXX, and are not intended to encompass the future sale of the shares of XXXX presently held by XXXX or the shares of XXXX held by XXXX and the XXXX. As indicated in sections XXXX and XXXX of the Agreement, the sale of these shares will occur on XXXX at the earliest, and even though XXXX has surrendered all right and interest in these shares pursuant to XXXX of the Agreement, XXXX has not, according to our understanding, received any payment therefor.
The essentials of the Agreement between XXXX and XXXX as they relate to the XXXX may be summarized as a sale of these shares to XXXX for cash consideration payable monthly over a period commencing XXXX and ending XXXX. The series of monthly payments create a debt owing by XXXX to XXXX. In order to secure this debt, XXXX issued the XXXX under the terms and conditions of the XXXX upon the closing date of the Agreement, which was XXXX.
In formulating our opinions given below, we have assumed that the fair market value of the XXXX is equal to the fair market value of the XXXX. We have also assumed that the XXXX represent security for or evidence of, rather than absolute payment for the debt created in respect of the sale of the XXXX. We must stress that these assumptions are basic to our opinions, and can only be substantiated or varied after a determination of fact has been made. At this time, we would mention that a verbal legal opinion obtained on an informal basis agreed with our view that the XXXX represent security or evidence of, rather than absolute payment for, the XXXX.
Opinions
The acquisition of the XXXX by XXXX is a transaction to which the provisions of subsection 84(3) of the Act apply. Consequently, XXXX would be deemed, pursuant to paragraph 84(3)(b) of the Act, to have received a dividend equal to the amount by which the amount paid by XXXX for the XXXX exceeds the paid-up capital in respect of those shares immediately before the acquisition. Paid-up capital has the meaning assigned by paragraph 89(1)(c) of the Act.
As consideration for the redemption of the XXXX received a promise to pay as represented by the stream of monthly payments, commencing XXXX and ending XXXX. To secure this debt, XXXX issued the XXXX. It is our view that the security so issued is a security described under subsection in 76(1) of the Act, since the amount of debt so secured is a debt that would, when payable, be included in XXXX income pursuant to paragraphs 84(3)(b) and 12(1)(j) of the Act. Since the XXXX were receivable by XXXX on the closing date of the Agreement, and since the XXXX provides that all or a portion of such shares can only be delivered to XXXX on the basis of the amount of underlying debt paid, we are also of the view that the provisions of subsection 76(2) of the Act would apply, with the result that XXXX would be subject to the provisions of paragraphs 84(3)(b) and 12(1)(j) of the Act only with respect to the amount of debt that becomes due and payable pursuant to Section 2 of the Agreement. Applying these conclusions to XXXX 1988 taxation year, the dividends deemed to have been received by her and consequently reportable by XXXX as dividends in respect of that year would comprise the XXXX monthly its of $ XXXX due and payable from XXXX to inclusive, for a total amount of $XXXX. The Department's views on the application of subsections 76(1) and (2) of the Act may be found in IT-77R dated September 15, 1980.
We would point out that our opinions are based on the facts and assumptions given above, and are not intended to imply our acceptance of the purchase price determined by the parties involved, or a conclusion as to whether such purchase price was one determined by persons dealing at arm's length with one another. These are questions of fact that you may wish to look into now or later. We also observed that the total number of payments said to be receivable by XXXX equals a total purchase price of $XXXX and that this is the figure arrived at when the number of XXXX shares) is multiplied by $XXXX, the amount referred to in section 3(3) of the XXXX. You will note that this amount differs from the figure of $XXXX mentioned by XXXX in their letter of September 22, 1988.
Original signed by
J.C. Clark Chief Corporate Reorganizations I Section Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch
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