29 March 1994 External T.I. 9322245 - DIVIDENDS NOT PAID

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.

Principal Issues:

Amount of capital gain attributable to non-payment of dividends under 110.6(8).

Position TAKEN:

Question of fact. No specific guidelines.

Reasons FOR POSITION TAKEN:

Previous position.

            932224
XXXXXXXXXX  W.P. Guglich
(613) 957-2102

Attention: XXXXXXXXXX

March 29, 1994

Dear Sirs:

Re: Subsection 110.6(8) of the Income Tax Act (the "Act")

This is in reply to your letter of July 28, 1993 concerning the application of subsection 110.6(8) of the Act.

Unless as otherwise stated all references to statute are to the Income Tax Act S.C. 1970-71-72, c.63 as amended consolidated to June 10, 1993.

Specifically, you requested the Department's opinion as to whether the aforementioned subsection might apply to the scenario outlined in your letter. We understand that your main concern centres around the determination of the amount of capital gain attributable to the non-payment of dividends under subsection 110.6(8) of the Act.

Our Comments

The scenario outlined in your letter appears to relate to actual proposed transactions involving identifiable taxpayers which, as reflected in paragraph 3 of Information Circular 70-6R2, should be the subject of an advance income tax ruling request. The Department will rule on the application of subsection 110.6(8) of the Act when all the facts can be determined at the time of the request. Notwithstanding the above, we offer the following general comments.

Subsection 110.6(8) of the Act will apply to deny a capital gains exemption deduction if it may reasonably be concluded, having regard to all the circumstances, that a significant part of a capital gain is attributable to the fact that dividends were not paid on a share (other than a prescribed share) of a corporation or, if paid, were less than a required amount.

In interpreting the phrase "a significant part of the capital gain" it is our view that the determination of what constitutes a significant part of the capital gain is a question of fact which must be decided in each particular case having regard, as the subsection states, to all the circumstances. Accordingly, the Department has not developed detailed or specific guidelines in respect of this issue. While we are of the view that in many cases this question is appropriately answered by ascertaining the proportion or percentage of the capital gain that is attributable to the non-payment of adequate dividends, we are also of the view that there may be circumstances where it is appropriate to consider the amount or magnitude, expressed in dollars, of the capital gain that is so attributable.

We trust these comments will be of assistance.

Yours truly,

R. Albert
for Director
Business and General Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Directorate