23 December 1992 Income Tax Severed Letter 9237670 - Purification

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.

         Manitoba Bar Association & Institute of
                  Chartered Accountants

                 Revenue Canada Round Table

Question 5 - Subsection 55(2) and Purification Transactions

Wold the Department apply the provisions of subsection 55(2) to tax-free intercorporate dividends included in a series of transactions designed to purify a corporation in order to have the shares of the corporation qualify as "qualified small business corporation shares" as defined in subsection 110.6(1) where

(a)      the shareholders have no intention to sell their
         shares in the next three years;

(b)      the shareholders have not identified a purchaser
         and there is a general intention to sell the shares
         in the next three to five years;

(c)      the shareholders have identified a purchaser and it
         is anticipated that the shareholders will sell
         their shares within the year?

Department's Position

Where the purification is part of the same series of transactions in which the shareholders of the corporation dispose of their shares to an arm's length purchaser then the provisions of subsection 55(2) could apply to the intercorporate dividends included in the series of transactions. Subsection 248(10) deems a series of transactions to include any related transactions or events completed in contemplation of the series. We are of the view that a preliminary transaction will form part of a series determined with reference to subsection 248(10) if, at the time the preliminary transaction is carried out, the taxpayer intends to implement the subsequent transactions constituting the series, and the subsequent transactions are eventually carried out. Thus, the preliminary and subsequent transactions will be part of a series even though at the time of the completion of the preliminary transaction the taxpayer either had not determined all the important elements of the subsequent transactions - including, possibly, the identity of the other taxpayers involved - or had lacked the ability to implement the subsequent transactions. Whether two transactions are part of the same series of transactions determined with reference to subsection 248(10) is a question of fact which will depend upon the circumstances of each case. However, we can make the following general observations concerning each of the above situations.

(a)      In situation (a), the fact that the shareholders
         have no intention of selling their shares within
         the next three years is not conclusive that the
         receipt of the dividends is not part of the series
         which includes an eventual sale of the shares to an
         arm's length person.  The facts of each particular
         situation would have to be reviewed to determine
         whether subsection 55(2) would apply to the series
         of transactions.

(b)      Where, at the time the dividends are received, the
         shareholders have an intention to sell their
         shares, the purification and the eventual sale,
         would generally be considered to be part of the
         same series of transactions determined with
         reference to subsection 248(10), notwithstanding
         the fact that the shareholders had not identified a
         purchaser and that the eventual sale may not be
         completed for several years.

(c)      The purification and the eventual sale, in such a
         situation, would be considered to be part of the
         same series of transactions, determined with
         reference to subsection 248(10), since the
         shareholders intend to sell their shares and a
         purchaser had been identified at the time of the
         reorganization.

File: 923767

M. Sarazin December 23, 1992