7 September 1990 Ruling 901891 F - Intercorporate Dividends on Corporate Reorganization

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.

September 7, 1990

Dear Sirs:

We are writing in response to our telephone conversation, 19(1) Teixeira, on August 15, 1990 regarding the application of subsection 55(2) to the situation described below.

1.     Mr. A and Mr. B are brothers and are Canadian residents.

2.     Each owns 50% of the issued shares of a Canadian Corporation "Holdco" which in turn owns 100% of the issued shares of "Opco".

3.     The assets of Opco consist of 2 rental properties, a building and land used in a business, and other assets.

4.     A and B would like to remove the real estate from Opco to protect it from the risks of the business.

A reorganization is proposed as follows:

-     Two new companies will be incorporated and will be owned 50/50 by A and B.

-     Opco will sell the rental properties to Newco I and the  building and land used in the business to Newco II pursuant to subsection 85(1) of the Act. The consideration will consist of preferred shares.

-     A and B will transfer shares of Holdco to Newco I and Newco II, which represent the proportion of the fair market value of Opco that the fair market value of the real properties is of all the fair market value of properties of Opco. Elections will be filed pursuant to  subsection 85(1) of the Act.

-     Newco I and Newco II will redeem the shares issued to Opco.

-     Opco will utilize the funds received from Newco I and Newco II to pay a dividend to Holdco.

-     Holdco will utilize the receipt of the dividends to redeem the shares that are held by Newco I and Newco II.

It is your opinion that 55(2) of the Act will not apply to the proposed reorganization because of the exemption found in subparagraph 55(3)(a)(i) of the Act; the dispositions of property by Opco to Newco I and Newco II will be dispositions to non-arm's length persons. This would be the case notwithstanding the fact that paragraph 55(5)(e) of the Act deems brothers, for the purposes of subsection 55(2), to be unrelated and deal at arm's length, because Opco and Newco I and II will be at non-arm's length by virtue of being controlled directly or indirectly by the same group of persons. The fact that such persons are not related and are dealing at arm's length for purposes of subsection 55(2) is immaterial in making this determination.

Opinion

The provisions of subsection 55(2) of the Act will apply to the dividends resulting from the above transactions because there is an increase in the interest of A and B in Newco I and Newco II and for purposes of subsection 55(2) of the Act, A and B deal at arm's length with the corporations that receive the dividends.

Yours truly,

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