27 June 1995 External T.I. 9425365 - DISPOSITION OF CASH

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:

Would the payment of cash on a purchase for cancellation be considered a disposition of property for purposes of 55(3)(a)(i)?

Position TAKEN:

Yes.

Reasons FOR POSITION TAKEN:

Wording of provision contemplates transaction.

		5-942536
XXXXXXXXXX	D. Yuen

Attention: XXXXXXXXXX

June 27, 1995

Dear Sirs:

Re: Paragraph 55(3)(a) of the Income Tax Act

We are writing in response to your letter of September 19, 1994 wherein you requested our opinion on the following situation:

Situation

Corporation A is a taxable Canadian corporation which has the meaning assigned by subsection 89(1).

The share capital of Corporation A consists of common shares which are owned as follows: 90% by a husband and wife, 5% by their son and 5% by an unrelated estate.

The husband and wife want to transfer certain capital assets of Corporation A to a new corporation, Newco, which they will own for the purposes of estate planning (the "Spinoff Transaction"). The avoidance of tax on capital gains is not a purpose of the transactions.

In the course of the Spinoff Transaction, deemed dividends pursuant to subsection 84(3) will result from the redemptions of the shares of Corporation A and Newco. The provisions of subsection 55(2) may be applicable to such dividends.

Immediately prior to the Spinoff Transaction, Corporation A will purchase for cancellation the common shares owned by the son and the unrelated estate which will result in taxes payable on the dividends deemed to be received by those parties.

Your Questions

Would the purchase for cancellation by Corporation A of its common shares owned by the unrelated estate be considered part of the Spinoff Transaction ?

Would the payment of cash on the purchase for cancellation by Corporation A of its common shares owned by the unrelated estate be considered a disposition of any property to a person with whom Corporation A was dealing at arm's length ?

Our Comments

The determination of whether the purchase for cancellation of the shares of Corporation A held by the unrelated estate is part of the same series of transactions which includes the Spinoff Transaction is a question of fact and, as indicated in subparagraph 14(j) of Information Circular IC 70-6R2 dated September 28, 1990 (IC 70-6R2"), we are unable to provide any comments on this matter.

Since Corporation A will have disposed of cash on the purchase for cancellation to a person to whom Corporation A is not related, the provisions of subparagraph 55(3)(a)(i) will be applicable. Therefore, paragraph 55(3)(a) would not exempt the dividends from the application of subsection 55(2).

The foregoing comments are given in accordance with the practice referred to in paragraph 21 of IC 70-6R2 and are not binding on Revenue Canada.

Yours truly,

for Director
Reorganizations and Foreign Division
Income Tax Rulings and
Interpretations Directorate

ENDNOTES

¹ Policy and Legislation Branch All statutory references in this letter are to the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.) c. 1, as amended.