7 December 1993 Income Tax Severed Letter 9333430 - Proposed Amendment to Subsection 55(3.1)

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.

Tax Executive Institute December 7, 1993

Question No. 3.B

Proposed Amendment to Subsection 55(3.1)

The most recent proposed amendments to subsection 55(3.1) appear to provide that the "butterfly" exemption in paragraph 55(3)(b) will not apply where, as part of a reorganization, a non-resident holds shares of the particular corporation as taxable Canadian property and then disposes of those shares to someone in an arm's-length transaction with the non-resident. This will apparently be the result even though:

(a)      the non-resident's share interest in the particular
         corporation or transferee is nominal;

(b)      the gain realized by the non-resident on the share
         sale is not treaty-exempt; or

(c)      there is no gain inherent in the non-resident's
         shares.

Is it Revenue Canada's position that such an arm's-length disposition by the non-resident would preclude all shareholders of the corporation from relying on paragraph 55(3)(b) to exempt any dividends received by them from the application of subsection 55(2)?

Department's Position

If the dividends received by the other shareholders are part of a series of transactions or events which includes the arm's-length disposition by the non-resident, subsection 55(3.1) will apply to preclude the other shareholders from relying on paragraph 55(3)(b) to exempt the application of subsection 55(2) to those dividends. Whether any particular transaction is considered to be part of a series of transactions depends on the relevant facts and circumstances.

We understand that the Tax Executives Institute will be meeting with officials from the Department of Finance to discuss whether the provisions of proposed subsection 55(3.1) were intended to apply in the circumstances outlined above.

Author: T. Bryant File: 933343 Date: November 30, 1993