18 May 1994 External T.I. 9405975 - CAPITAL GAINS EXEMPTION

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 subsection 110.6(8) of the Act.

Position TAKEN:

Question of fact. No specific guidelines.

Reasons FOR POSITION TAKEN:

Department's standard response.

                                                                  5-940597
XXXXXXXXXX                                C. Chouinard

Attention: XXXXXXXXXX

May 18, 1994

Dear Sirs:

Re: Capital Gains Exemption - Subsection 110.6(8) of the Income Tax Act

We are writing in reply to your letter of March 4, 1994 in which you requested our comments regarding the application of the above-captioned provision of the Income Tax Act (the "Act") in a particular situation.

You are concerned with whether subsection 110.6(8) of the Act will apply to deny the capital gains exemption arising on the disposition of common shares in view of the fact that dividends were not paid on preferred shares. In your view, subsection 110.6(8) of the Act will not apply as the accrued capital gain on the common shares is not attributable to the fact that dividends were not paid on the preferred shares and the cumulative feature of the preferred shares results in the value of the accumulated and unpaid dividend being attributed to the preferred shares.

Our Comments

The facts outlined in your letter appear to relate to actual proposed transactions involving particular taxpayers and therefore a binding determination from Revenue Canada regarding the applicability or inapplicability of subsection 110.6(8) can only be obtained by way of an advance tax ruling request following the procedures outlined in Information Circular 70-6R2. We are, however, prepared to 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.

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

We trust that these comments will be of assistance.

Yours truly,

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