19 December 1990 Ministerial Letter 902918 F - Shares Issued to Avoid Tax

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.

19(1)

December 19, 1990

Dear Sirs:

Re:  Subsection 95(6) of the Income Tax Act (the "Act")

This is in response to your letter of October 18, 1990 wherein you requested clarification of the application of subsection 95(6) of the Act in the context of the following fact situation.

1.     Corporation A is a taxable Canadian corporation.

2.     Corporation B is a non-resident corporation which is not a foreign affiliate of corporation A nor is it controlled, directly or indirectly in any manner whatever, by corporation A or by a related group of which corporation A is a member.

3.     Corporation A invests in a class of shares of corporation B such that the equity percentage of corporation A in corporation B is a least 10%.

In your view paragraph 95(6)(b) of the Act cannot apply under these circumstances because corporation B was not a foreign affiliate of corporation A before the issuance by corporation B of shares to corporation A. Therefore, for the purpose of paragraph 93(6)(b), it would not be a foreign affiliate of A that issued the shares. Furthermore, you feel that even if paragraph 95(6)(b) could apply under these circumstances it would be necessary to make arbitrary assumptions concerning an alternate use of funds by corporation A had it not invested them in the shares of corporation B, in order to determine "the amount of taxes that would otherwise be payable under the Act" for the purposes of that provision.

We disagree with your interpretation, in our view the wording of paragraph 95(6)(b) of the Act is sufficiently broad to permit it to apply where the share issue was, in retrospect, by a foreign affiliate. A similar timing question exists in respect of subsection 93(4) of the Act and subsection 5905(8) of the Regulations to the Act. It is our view the wording of those provisions is also sufficiently broad to permit the interpretation that, in retrospect, the shares were acquired from (in subsection 93(4) of the Act), or the shares were disposed of to (in subsection 5905(8) of the Regulations to the Act), a foreign affiliate. Any other interpretation would not permit those provisions to apply to some transactions which they were clearly intended to be applicable to.

The question of whether one of the main reasons for the existence or issuance of shares can reasonably be considered to be the reduction or postponement of the amount of taxes that would otherwise be payable, for the purposes of paragraph 95(6)(b) of the Act however, is one of fact that can only be determined with full knowledge of all the particulars of a situation. In our view, the information presented in your example is inadequate for the purposes of making this determination.

We hope that the above will be of assistance to you.

Yours truly,

for DirectorReorganizations and Non-Resident DivisionRulings DirectorateLegislative and IntergovernmentalAffairs Branch