22 October 1990 Administrative Letter 902306 F - Determination of Paid-up Capital

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:  24(1)

This is in response to your memorandum of August 29, 1990, wherein you requested our comments regarding the application of former subsection 183.1(1) of the Income Tax Act (the "Act") to the above taxpayer.

Our understanding of the facts is as follows:

24(1)

24(1)

The term "paid-up capital" (PUC) as used here and subsequently has the meaning assigned by paragraph 89(1)(c) of the Act.

24(1)

Your concern is that as a result of the series of transactions a deemed dividend has been converted into a capital gain and as such former subsection 183.1(1) of the Act may be applicable to the transactions described above.

In this regard we offer the following comments:

The provisions of section 84.1 of the Act apply when an individual shareholder resident in Canada disposes of his shares of a Canadian corporation (the subject shares) to another corporation (the purchaser corporation) in a non arm's length transaction and following which the subject corporation is connected with the purchaser corporation within the meaning of subsection 186(4) of the Act 24(1)

Paragraph 84.1(1)(a) of the Act applies to the determination of the paid-up capital of the 24(1) as follows:

(A  -  B)  X      C     A

A = PUC increase in respect of all shares of the purchaser corporation.

B = Greater of:

(i)     PUC of subject shares

(ii)     ACB of subject shares - as adjusted by paragraphs 84.1(2) (a) and (a.1)

C = PUC increase in respect of particular class of shares of the purchaser.

In calculating the adjusted cost base of any share acquired before 1972, for the purposes of determining B above, it will be necessary pursuant to subparagraph 84.1(2)(a)(ii) of the Act to require a determination of the aggregate amount of dividends paid on that share in respect of which the corporation that paid the dividend made an election under subsection 83(1) of the Act.

In the event that any share that has been sold to 24(1) as a share acquired by the vendor after 1971 in a non-arm's length transaction, was a share substituted for such a share or was a share substituted for a share owned by the taxpayer at the end of 1971, the provisions of paragraph 84.1(2)(a.1) of the Act will determine the adjusted cost base of the share disposed of for purposes of determining B above.

24(1)

Former subsection 183.1(6) of the Act ensured that a corporation would not be taxed under subsection 183.2(1) thereof on an acquisition of a share where certain provisions of the Act, including section 84.1, applied in respect of the acquisition or the series of transactions or events of which the acquisition was part.  24(1)

If there are any transactions subsequent to the above we would be prepared to offer our comments as to any tax implications resulting from such transactions.

DirectorReorganizations and Non-Resident DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch