7 September 1990 Administrative Letter 901756 F - Surplus Strip

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.

Dear Sir:

We are writing in response to your letter dated July 20, 1990 wherein you requested our opinion regarding the application of the Income Tax Act (Canada) (the "Act") to the following situation.  

24(1)

You would like us to comment on the following opinions that you have expressed regarding the above situation:

24(1) 

It appears that the interpretation you seek relates to specific taxpayers and, therefore, we bring to your attention Information Circular 70-6R dated December 18, 1978 issued by Revenue Canada, Taxation and the related Special Release thereto.  Confirmation with respect to proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling.  If you wish to obtain an advance income tax ruling with respect to specific transactions which are contemplated, a written request for an advance income tax ruling can be submitted in accordance with the Information Circular. Nevertheless, we can offer the following general comments.

As indicated at pages 50 to 53 of the Technical Notes to a Bill Amending the Income Tax Act and Related Statutes issued by the Honourable Michael Wilson, Minister of Finance, in November 1985,

     "Section 84.1 of the Act is an anti-avoidance rule to prevent the removal of taxable corporate surpluses as a tax-free return of capital where there is a non-arm's length transfer of shares by an individual resident in Canada to a corporation....

     The basic rule under new subsection 84.1(1) is that the maximum amount that can be received by the transferor from the transferee corporation as proceeds in the form of any  non-share consideration and the paid-up capital of the share consideration is restricted to the greater of the paid-up capital of the transferred shares and what might be referred to as the transferor's arm's length actual adjusted cost base of the shares...

     New paragraph 84.1(1)(b) treats the purchaser corporation as having paid a dividend to the transferor where the aggregate of the amount of the increase in the legal paid-up capital of its shares arising as a result of the share transfer and the fair market value of the non-share consideration given by it for the transferred shares  exceeds the total of

     (a)  the greater of the adjusted cost base, as modified under new paragraph 84.1(2) (a) or (a.1), to the transferor of the transferred shares and the paid-up capital of the transferred shares, and

      (b)  the total paid-up capital reductions required by paragraph 84.1(1)(a) to be made by the purchaser corporation.

     The excess is the amount that will be treated as a dividend."

It is, therefore, our view that 24(1) "Adjusted cost base" for the purposes of subsection 64.1(1) has the meaning assigned by paragraph 84.1(2)(a) and (a.1) of the Act.  24(1)

It is also our view that a corporation resident in Canada would, subject to subsections 112(2.1), (2.2) and (2.4) of the Act, be allowed to deduct in computing its taxable income the amount of taxable dividends received from a taxable Canadian corporation pursuant to subsection 112(1) of the Act.

Where a transaction results in the application of a specific anti-avoidance provision, such as section 84.1 of the Act, the general anti-avoidance provision found in subsection 245(2) of the Act would not normally apply to the transaction.

The foregoing comments represent our general views with respect to the subject matter of your letter.

Yours truly,

for DirectorReorganizations and Non-Resident DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch