2 February 1995 External T.I. 9502895 - 56(2) AND NEUMAN CASE

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: (1) taxpayer looking for opinion on proposed 	 		set of transactions	

(2) taxpayer relying on Neuman decision to 		support the non-application of subsection 		56(2) 	

Position TAKEN: 	(1) taxpayer advised to apply for a ruling in 		accordance with IC 70-6R2
(2) taxpayer advised that Neuman has been 		appealed to Federal Court of Appeal and, at 		present, there is no change in the 		Department's position regarding the 		application of subsection 56(2) where dividend 		recipient not make adequate contribution to 		company

Reasons FOR POSITION TAKEN: -N/A

			950289
M. P. Sarazin
XXXXXXXXXX		(613) 957-2118

Attention: XXXXXXXXXX

February 2, 1995

Dear Sirs:

This is in reply to your letter dated January 26, 1995 wherein you requested assurance that the Department would not apply the provisions of subsections 56(2) and 245(2) of the Income Tax Act (the "Act") to the series of proposed transactions described in your letter.

Confirmation with respect to proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. We have enclosed a copy of Information Circular 70-6R2 dated September 28, 1990 and the Special Release thereto dated September 30, 1992 which sets out the guidelines under which advance income tax rulings are issued. The current hourly fee charged for advance income tax rulings is $90 (plus Goods and Services Tax) and a deposit of $481.50 equal to five hours of work plus Goods and Services Tax is required to be submitted with a request for a ruling.

In your letter, you have cited the decision rendered in Melville Neuman v. The Minister of National Revenue 92 DTC 1652 (TCC) as support for your position that subsection 56(2) of the Act would not apply to certain dividends. We would like to bring to your attention the fact that the decision rendered by the Tax Court of Canada in the particular case was confirmed by the Federal Court - Trial Division (94 DTC 6094) and that the Department has appealed this decision to the Federal Court of Appeal. Consequently, it remains our position that subsection 56(2) may apply to dividends paid in a closely held corporation in those situations where the shareholder receiving the dividend does not make adequate contribution, financial or otherwise, to the corporation.

We hope that the above information will be of help to you.

Yours truly,

for Director
Reorganizations and Foreign Division
Rulings Directorate
Policy and Legislation Branch