29 May 1990 Ruling 900831 F - Review of Corporate Reorganization Course Material

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.

SUBJECT: Review of Corporate Reorganization Course Material Lesson 2:  Paid-up Capital and Deemed Dividends

This memorandum is in response to yours dated April 3, 1990 in which you requested a technical review of the draft Corporate Reorganizations course materials. We have reviewed the draft version of Lesson 2 provided to us under cover of your memorandum and attach a copy of same marked with our handwritten comments and suggested changes.  As the materials provided for our review already contained some handwritten comments, we have taken the liberty of encircling such comments in order to distinguish them from the comments made by us.

In addition to suggested changes that appear on the attached materials, we suggest the following changes:

(a)     Paragraph c) entitled "Amalgamations" on page E/COR/200/90/HO/3.11 should be replaced with the following:

     It is possible that under the corporate laws of some jurisdictions the legal PUC of the shares of the amalgamated corporations may, as a result of certain kinds of amalgamations, exceed the aggregate of the legal PUC of the shares of the amalgamating corporations.  Subsection 87(3) ensures that the TPUC of the shares of the amalgamated corporation will not exceed the aggregate TPUC of the shares of the amalgamating corporation that are held by any other amalgamating corporation.

(b)     The first paragraph under section 4.3 entitled "Benefits" on page E/COR/200/90/HO/3.20 should be replaced with the following:

     A controlling shareholder or a corporation may confer a benefit on other shareholders or prospective shareholders of the corporation by having the corporation issue shares to them at less than fair market value.  The controlling shareholder would thus be reducing his economic interest in the corporation in favour of the recipients of the new shares.  The conferral of such a benefit would be subject to the scrutiny of subsection 15(1) with the result that the value of the benefit would likely be taxed as income in the hands of the recipients of such shares.

     A similar result could be achieved by having the corporation issue to all shareholders, including the controlling shareholder, a right to acquire shares at less than fair market value and having the controlling shareholder simply refrain from exercising his right to acquire the shares.  In such an event, the issuance of the rights might not be subject to subsection 15(1) by virtue of the exemption in paragraph 15(1)(c).  However, where the result of such transactions is that the controlling shareholder has effectively disposed of a portion of his interest in the corporation to persons with whom he does not deal with at arm's length, it would appear that such transactions were designed to circumvent the application of subsection 69(1) and that subsection 245(2) might therefore apply to determine the appropriate tax consequences.

We trust you will find our comments to be of assistance.

for DirectorReorganizations and Non-Resident DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch