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.
951377
XXXXXXXXXX A. Seidel
Attention: XXXXXXXXXX
May 26, 1995
Dear Sirs:
This is in reply to your letter dated May 11, 1995 in which you requested our views on the application of subsection 129(1.2) of the Income Tax Act (the "Act") to an inter-corporate dividend in the situation where the purpose test in subsection 129(1.2) of the Act has been met but you believe that the series of transactions does not offend the intent of the provision as outlined in the Explanatory Notes to Draft Legislation and Regulations Relating to Income Tax Reform issued in April of 1988.
You have described the situation where a corporation ("Company A") has refundable dividend tax on hand but no remaining assets to distribute as a dividend, Company A would be unable to access the dividend refund. Another unrelated corporation ("Company B") acquires all of the shares of Company A, transfers cash into the corporation and then has Company A pay an inter-corporate dividend to trigger the dividend refund. Company B would be subject to Part IV tax on the dividend received. The shareholders of Company B are individuals resident in Canada.
We do not agree with your view that subsection 129(1.2) was not intended to apply to the series of transactions described in your letter. The purpose of the Part IV tax/dividend refund provisions of the Act is to place resident shareholders of private corporations in approximately the same after-tax position as if they had received Canadian and/or foreign investment income directly rather than through a corporation (after taking into account the dividend gross-up and the dividend tax credit). It is our view that the series of transactions described above which would allow the shareholders of Company B to access the dividend refund which was intended to be available to the shareholder(s) of Company A in respect of the investment income earned by Company A would be an inappropriate result and that subsection 129(1.2) of the Act was intended to apply to this type of situation.
In any event it is our view that the provisions of subsection 129(1.2) of the Act will apply to a dividend in any situation where "one of the main purposes" of acquiring a share and paying a dividend on that share is to enable a corporation to obtain a dividend refund. Therefore, in the situation where a series of transactions is entered into with the sole purpose of gaining access to refundable dividend tax on hand, subsection 129(1.2) of the Act will apply to deem the dividend not to be a taxable dividend.
These comments are provided in accordance with the guidelines set out in paragraph 21 of Information Circular 70-6R2.
Yours truly,
for Director
Reorganizations and Foreign Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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