11 January 1994 External T.I. 9334235 F - CDA Anti Avoidance Rules

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.

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Attention:  XXXXXXXXXX

Dear Sirs:

RE:  Subsection 83(2.1) of the Income Tax Act (Canada) (the Act")

This is in reply to your letter dated November 22, 1993 wherein you requested our comments with respect to the possible application of subsections 83(2.1), (2.2) and (2.4) of the Act in the following situation.

A and C are related individuals that are residents of Canada for purposes of the Act. Until his death, B was related to each of A and C and he was also a resident of Canada for purposes of the Act. A and C who are the beneficiaries of B's estate, each own 25% and B's estate owns 50% of the issued and outstanding shares of Opco. Opco is a Canadian-controlled private corporation, within the meaning assigned by paragraph 125(7)(b) of the Act, and it has a balance in its capital dividend account. For greater certainty, the amount in the capital dividend account is the result of a capital gain realized while Opco was owned by A, B and C.

Each of A and C will incorporate a holding company (hereinafter referred to as "A Co." and "C Co.", respectively). A will transfer his shares of Opco to A Co. and C will transfer his shares of Opco to C Co.

Opco will then declare a dividend and elect under the provisions of subsection 83(2) of the Act to have the full amount of the dividend paid out of its capital dividend account. The dividend will be paid by way of a non-interest bearing demand promissory note. B's estate will utilize its share of the capital dividend to pay its income tax liability resulting as a consequence of B's death.

You have asked us to confirm that the provisions of subsections 83(2.1) of the Act would not apply to the capital dividend paid by Opco to the Estate, by virtue of subsections 83(2.2) of the Act, and to each of A Co. and C Co., by virtue of subsection 83(2.4) of the Act. In addition, you would like us to confirm that, by virtue of the application of subsection 83(2.2) of the Act, subsection 83(2.1) of the Act would not apply to the subsequent payment of a capital dividend by A Co. to A and by C Co. to C.

It appears that the interpretation you seek relates to proposed transactions to be undertaken by specific taxpayers and, therefore, we bring to your attention Information Circular 70-6R2 dated September 28, 1990 and the Special Release thereto dated September 30, 1992, issued by Revenue Canada, Customs, Excise and Taxation. Confirmation with respect to proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling.

If you wish to obtain an advance income tax ruling for particular taxpayers with respect to specific transactions which are contemplated, a written request for an advance income tax ruling can be submitted in accordance with the Information Circular. Nevertheless, we can offer the following general comments.

Whether or not the anti-avoidance provisions of subsection 83(2.1) of the Act would apply to any situation can only be determined subsequent to a review of all of the facts in each particular situation. The Department's general views on the application of subsection 83(2.1) of the Act are set out in paragraph 21 of Interpretation Bulletin IT-66R6.

The provisions of subsection 83(2.1) and (2.4) of the Act provide exceptions where the anti-avoidance rule in subsection 83(2.1) of the Act will not apply. The Department's general views on the application of subsections 83(2.2) and (2.4) of the Act are set out in paragraph 22 of IT-66R6. In addition, we would refer you to the Department of Finance Explanatory Notes for S.C. 1988, c.55 (formerly Bill C-139; Royal Assent September 13, 1988) dated June 1988 which introduce the particular anti-avoidance provisions.

In a situation where an individual transfers his or her shares in a related corporation which has a balance in its capital dividend account to a newly incorporated holding corporation in exchange for shares of the holding corporation and the corporation pays a capital dividend to the new holding corporation, it would appear that the capital dividend would not be exempted from the application of subsection 83(2.1) by virtue of paragraph 83(2.4)(b) of the Act, i.e. the corporation's capital dividend account would have arisen before it became related to the holding corporation. Consequently, for the purposes of subsection 83(2.1) of the Act, it will be a question of fact as to whether or not one of the main purposes of acquiring the corporation's shares was to receive a dividend out of its capital dividend account. However, in order to make such a determination we would generally look to the main purpose for the acquisition by the individual of the original shares which were transferred to the holding corporation.

We trust that the above comments will be of assistance to you.

Yours truly,

for DirectorReorganizations and Foreign DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch