23 October 1992 Income Tax Severed Letter 9226925 - Rights and Things Deemed Dividend not Declared Dividend

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.

922692
R.B. Day
19(1) (613) 957-2136

October 23, 1992

Dear 19(1)

Re: Subsection 70(2) of the Income Tax Act (the Act)

We are writing in reply to your letter of September 3, 1992, wherein you requested our interpretation of the above noted subsection as it relates to a corporate resolution to redeem preferred shares of a Canadian Controlled Private Corporation, which would result in the receipt of a taxable dividend by the holders of those shares at the date of redemption.

It would appear that this situation relates to an actual taxpayer and a factual situation that should be submitted to the appropriate district taxation office for their consideration. Our comments will, therefore, be of a general nature.

Our Comments

Paragraph 12 of IT-212R3 states that where a dividend is declared but not paid prior to the death of a taxpayer, it

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is a right or thing if the ex-dividend date or the date of record was prior to the date of death.

Although paragraph 84(3)(b) of the Act results in a taxable dividend being deemed to have been received by the holders of the shares, no dividends are actually declared payable under the corporate resolution or actually paid by the corporation as a consequence of the implementation of the corporate resolution on the actual redemption date. As a consequence, the corporate resolution would not be considered to be a declaration of a dividend, as that term is ordinarily understood and the deemed dividend would not be rights or things for purposes of subsection 70(2) of the Act as discussed in paragraph 12 of IT-212R3. The fact that a corporate resolution called for a redemption prior to the date of death but the execution of the resolution was not carried out until subsequent to the date of death, would not alter our views in this regard.

In the situation described in your letter, it is our view that subsection 70(5) of the Act would deem the taxpayer to have disposed of all of the preferred shares immediately prior to death at their fair market value, resulting in the realization of a capital gain or capital loss, as the case may be, to be reported in the deceased taxpayer's ordinary return for the year of death, assuming of course that the shares were considered to be capital property of the taxpayer.

Redemption of the preferred shares pursuant to the corporate resolution would result in taxable dividends being deemed to have been received by the holders of those shares at the time of redemption, presumably the estate beneficiaries.

We trust our comments will be of assistance to you.

Yours truly,
P.D. Fuoco
for Director
Business and General Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch

c.c Technical Publications Division

Audit Directorate

Client Assistance Directorate

Assessment of Returns Directorate

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