5 October 1992 Income Tax Severed Letter 9228660 - Income Splitting

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Canadian Tax Foundation - November 1992 Revenue Canada Round Table

Question 22 - Income Splitting - Dividends

(a)Neuman v. MNR

         Since the Supreme Court of Canada's decision in
         McClurg v. MNR (
91 DTC 5001)
         the Department has assessed a benefit under subsection 56(2)
         of the Income Tax Act (the "Act") in a number of situations
         with facts similar to those in McClurg, except that the
         dividend recipient had either not made a legitimate
         contribution to the payor corporation or had otherwise
         been compensated by the corporation for the
         contribution.  We understand that these assessments have
         been made on the basis of the comments of Dickson C.J.C.
         in McClurg.

         In light of the decision of the Tax Court of Canada in
         Neuman v. MNR (
92 DTC 1652), does
         the Department intend to continue this assessing practice?

(b)Dividend Waivers

         A situation often arises where two shareholders of a
         corporation hold shares of the same class and the
         parties want only one of the shareholders to receive a
         dividend.  One way to achieve this result would be for
         the directors of the corporation to declare the
         dividend, have the shareholder who is not to receive the
         dividend waive his entitlement to it, and have the
         corporation pay the entire dividend to the other
         shareholder.

         What is the Department's position with respect to a
         waiver of dividends by a shareholder as described
         herein?  Would the Department's position be any
         different if at the beginning of a particular year a
         shareholder waives his entitlement to any dividends
         declared and paid in that year rather than to one
         specific dividend?

                     Department's Position

  (a)    In our view, the decision of the Supreme Court of Canada
         in McClurg is limited to the particular facts and
         situation which the Supreme Court addressed in that
         case.  The Department will continue to assess a benefit
         in those situations where the shareholder receiving the
         dividend did not make adequate contributions, financial
         or otherwise, to the corporation.  The decision of the
         Tax Court of Canada in Neuman v. MNR is being
         appealed.

  (b)    This topic has previously been addressed in question 41
         of the 1986, question 24 of the 1984, and question 26 of
         the 1981 Revenue Canada Round Tables.  As indicated in
         our responses to the Round Table questions referred to,
         subsection 56(2) will ordinarily be applicable if the
         waiver of dividends in a closely held corporation is
         undertaken for the purpose of transferring income to
         other shareholders.  While this may not be the case in
         an arm's length situation, the final determination will
         depend upon the facts of each case.

         The Department's position would be the same whether the
         dividend waiver is to be effective for the whole year or
         whether it would only apply to a specific dividend.

                                       Author: Simon Leung

                                             File # 922866

                                        September 15, 1993