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.
REVENUE CANADA TAXATION REVENU CANADA IMPÔT
MEMORANDUM NOTE DE SERVICE
DATE March 22, 1989
TO/À WINNIPEG DISTRICT OFFICE Audit Review J. Gaspar
FROM/DE Specialty Rulings Directorate
0. Laurikainen
(613) 957-2125
SUBJECT:
OBJET.:
FILE DOSSIER 7-3512
Tax consequences to Canadian shareholder of Reorganization of Capital by U.S. Company ----------------------------------------
This is in response to your memorandum dated December 12, 1988. Your enquiry involves a Canadian resident individual XXXX who is a shareholder in XXXX a U.S. resident corporation. During a reorganization of capita1 by XXXX the corporation redeems all of its common shares and in return issues new common shares and certain non-share consideration. You enquired about the Canadian tax consequences of the reorganization to XXXX.
Section 84 of the Act would not have application to this situation because XXXX is not resident in Canada. In these circumstances, the applicable U.S. corporate law will determine whether any portion of the amounts received XXXX is a dividend for Canadian tax purposes. U.S. tax law has no bearing on this. While you may wish to investigate this point further, based on an examination of the information supplied it would appear that for U.S. corporate purposes the amount received by the shareholders was not a dividend but represented a return of capital. For instance the transactions are described as a recapitalization where existing shares are converted into cash, debentures and a new share. In addition a certain portion of the amount received is treated as a dividend for U.S. income tax purposes and it would not seem necessary to have rules to treat an amount as a dividend if it was in fact a dividend.
The transaction as described above appears to be a reorganization of capital of a corporation to which the provisions of section 86 of the Act apply. In this case, as the fair market value of the non-share consideration received exceeds the ACB of to XXXX of his old shares of XXXX the ACB of his new shares will be nil and the proceeds of disposition of his old shares will be equal to the fair market value of the non-share consideration received.
The resulting capital gain should be computed in Canadian dollars and the relative U.S. dollar amounts should be converted to Canadian dollars at the rate of exchange in effect at the time XXXX acquired the old shares to determine his ACB and at the time XXXX received the non-share consideration on the recapitalization of XXXX to determine proceeds of disposition.
It is our understanding that XXXX has been refunded the amounts originally withheld by XXXX. In any case we would like to point out that for the purposes of computing non-business-income tax pursuant to paragraph 126(7)(c) we only consider taxes paid to the foreign government to the extent that they are not refundable and that pursuant to subparagraph 127(7)(c)(vii) such amounts that are attributable to a deduction claimed by the taxpayer under section 110.6 are not included in non-business-income tax.
K.H. Major
for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch
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© Her Majesty the Queen in Right of Canada, 1989
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© Sa Majesté la Reine du Chef du Canada, 1989