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.
19(1) |
File No. 5-9476 |
|
Firoz Ahmed |
|
(613) 957-2092 |
April 20, 1990
Dear Sirs:
Re: Section 245 of the Income Tax Act (Canada) (the "Act")
This is in response to your letter of January 22, 1990, in which you requested our views on the application of the general anti-avoidance rule ("GAAR") contained in section 245 of the Act to the acquisition of an employee's share of a corporation which were issued to him under an employee share purchase plan in the hypothetical fact situation described below.
Facts
1. The employer, Company X, a private corporation, within the meaning of paragraph 89(1)(f) the Act, determines to establish an employee share ownership plan (the "plan"). The majority of the voting shares of Company X are owned by company Y and will continue to be so owned throughout the time that the Plan is in operation.
2. Under the terms of the Plan, the employees of Company X (the "Employees") will be entitled to purchase shares of Company X. Such purchase by an Employee may give rise to a taxable benefit pursuant to section 6 or section 7 of the Act.
3. The shares if Company X are not purchased and sold in the manner in which shares are normally purchased and sold by a member of the public in the open market. Company X wishes to provide a market for its shares acquired pursuant to the Plan. The Plan has been designed so that Company X's wholly-owned subsidiary, Company X issued under the Plan from the Employees (the purchaser is referred to herein as "Sidecar Co.") in accordance with the terms and conditions of purchase contained in the Plan. Under the Plan, the Employees also have the option of selling shares issued under the Plan directly to Company X rather than to Sidecar Co.
4. Shares which are acquired by Sidecar Co. from the Employees will be acquired for cancellation by Company X for the same purchase price paid by Sidecar Co.
5. The primary purpose for an Employee selling his shares of Company X to Sidecar Co. instead of to Company X is to realize a capital gain, instead of a deemed dividend by virtue of subsection 84(3), which is eligible for the deduction contained in section 110.6 of the Act (the "capital gains exemption")
6. For purposes of this letter, it is assumed that any Employee who deposes of his shares of Company X under the Plan will deal at arm's length with Company X and Sidecar Co.
Opinions
In the hypothetical fact situation described above, the tax benefit, within the meaning of subsection 245(1) of the Act, would be the tax saved by an Employee as a result of receiving capital gains treatment and claiming the capital gains exemption, rather than deemed dividend treatment, on the disposition of his shares of Company X. The sale of shares by the Employee to Sidecar Co. or the acquisition of such shares from Sidecar Co. by Company X would be avoidance transactions, within the meaning of subsection 245(3), because the primary purpose of at least on of such transactions would be to enable the Employee to obtain such tax benefit.
Thus GAAR would apply to the series of transactions comprised of the sale of shares by the Employee to Sidecar Co. and the acquisition of such shares by Company X unless it may reasonably be considered that the transactions would not result directly or indirectly in a misuse of any of the provisions of the Act or an abuse having regard to the provisions of the Act read as a whole (subsection 245(4) of the Act).
The Act contains several provisions designed to prevent the conversion of dividend or other income into proceeds of disposition, in particular section 84.1 and Part II.1 of the Act. The following statement is contained in paragraph 25 of Information Circular 88-2:
Provisions, such as those mentioned above (sections 84.1 and 183.1 among others) indicate the circumstances in which amounts received by a shareholder of a corporation from the corporation on a disposition of shares or other property are to be accounted for as a dividend. If as a result of a series of transactions a shareholder realized a capital gain on the disposition of property and a transaction in the series is an avoidance transaction, subsection 245(2) will be applied to the transaction if it is determined that the series of transactions was carried our to thwart the purpose of the provision in question.
In this case, Part II.1 of the Act would not be applicable as Company X is not a corporation described in subsection 183.1(1) ("public or similar companies"). GAAR may be applicable in support of Part II.1 to arrangements involving corporations other than public or similar companies which are similar to those described in Part II.1 of the Act where the purpose of those arrangements is to concert employment income or dividend income into proceeds of disposition. An example of the first type of arrangement would be the issuance of preferred shares to employees where the redemption amount thereof varies with profits of Company X (i.e. so as to approximate a bonus) and the purchase of such shares by Sidecar Co. An example of the second type of arrangement would be the payment of a stock dividend comprised of low paid-up capital shares and the subsequent acquisition of such shares by Sidecar Co. "Paid-up capital" has the meaning assigned by paragraph 89(1)(c) of the Act. The hypothetical situation described herein does not appear to involve such a conversion of employment or dividend income of an individual to proceeds of disposition.
In the hypothetical situation descried herein, section 84.1 of the Act would not apply to the transfer of the shares of Company X by an Employee to Sidecar Co. and would not appear to have been improperly avoided in the manner contemplated in the extract reproduced form Information Circular 88-2.
In conclusion, we are of the view that GAAR would not generally be applicable to arrangement such as the hypothetical situation described herein. However, the particular circumstances of any real situation would have to be examined before a final determination could be made as to the application of GAAR thereto.
The above comments are only an expression of opinion and are not binding on Revenue Canada, Taxation as explained in paragraph 24 of Information Circular 70-6R.
Yours truly,
for DirectorReorganizations and Non-Resident DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch
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