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.
QUESTION 48 - DIVIDENDS AND SECTION 160
QUESTION
Under subparagraph 160(1)(e)(i) of the Act, a non-arm's length transferee of property may be liable jointly with the transferor and is limited to the amount by which the value of the transferred property exceeds the value of any consideration given for the property. Please comment on the application of this rule in the context of the declaration and payment of a dividend by a company to a shareholder with whom the company does not deal at arm's length at a time when the company is liable for tax. Receipt of a declared and previously unpaid dividend extinguishes the company's debt to the shareholder which is created when the dividend is declared. Does Revenue Canada agree that for the purposes of subparagraph 160(1)(e)(i) of the Act
(a) the declaration of the dividend does not constitute a transfer of property, and
(b) the extinguishment of the corporate debt on payment of the dividend constitutes valuable consideration given for the dividend?
In Fournier 91 DTC 746 the published reasons do not focus on this particular limitation.
ANSWER
Subparagraph 160(1)(e)(i) of the Act provides that in the case of any transfer (in this case the payment of the dividend), the transferor and the transferee are jointly and severally liable for the income tax liability of the transferor at the date of the transfer or for the portion thereof equal to the difference between the value of the property transferred and the consideration paid thereof, whichever is less. The purpose of this paragraph to prevent a person with substantial income tax liability from defeating the claims made on him by transferring his property to any non-arm's length party at less than fair market value consideration.
In certain fact situations the declaration of the dividend may constitute a transfer of property, and in other fact situations the payment of the dividend could, in our view, constitute a transfer of property. Property is defined in subsection 248(1) of the Act to include...(a) a right of any kind whatever...and (b) unless a contrary intention is evident, money. In declaring and later paying the dividend, the non-arm's length shareholder has much latitude to declare and pay whatever dividend he chooses to the extent that he may render the corporation incapable of satisfying it's corporate income tax liability. In a similar fact situation, it is our opinion that section 160 of the Act should apply.
Canadian Tax Foundation - B.C. Conference
September 1991
Claude Tremblay
Section 23
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 1991
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 1991
Email this Content