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 legal fees paid on an internal crystallization be excluded from 15(1) by 15(1)(a)?
Position TAKEN:
No. Internal crystallization is not a reorganization of the company's business as contemplated by 15(1)(a) and 15(1) refers to benefit received on an actual reorganization or redemption, cancellation or acquisition.
Reasons FOR POSITION TAKEN:
Reasonable reading of provision and findings in Kennedy on what constitutes a reorganization.
July 13, 1995
N. B. Squires Corporate
Director Reorganizations I
Halifax District Office D. Yuen
(613) 957-8967
Attention: K. McGuigan
Technical Advisor
7-951424
Paragraph 15(1)(a)
We are writing in response to your memorandum of May 24, 1995 wherein you requested our comments on the tax treatment of legal and accounting fees paid by a corporation which are incurred as a result of an internal crystallization (the "fees").
Your View
It is your view that, as the fees were incurred solely for the purpose of enabling the shareholder to utilize his or her capital gain deduction under section 110.6, the fees should be taxable under subsection 15(1). However, you believe that the fees may be excluded from the application of subsection 15(1) by paragraph 15(1)(a).
In addition, it is your view that, as there is no business purpose for the fees, they would not be deductible from income by virtue of paragraph 18(1)(a) and would not be considered an eligible capital expenditure as defined in subsection 14(5).
Shareholder benefit
It is our understanding that the purpose of paragraph 15(1)(a) is to exclude from the application of subsection 15(1) any amount paid to a shareholder which is taxed as a dividend under section 84. It is our view that this intention is evidenced in the paragraph by the reference ".., except to the extent that it is deemed by section 84 to be a dividend." None of subsections 84(1) and 84(3) to 84(5) would be applicable in the circumstances. However, subsection 84(2) could be applicable since it contains the phrase "on the winding-up, discontinuance or reorganization of its business" which is also found in paragraph 15(1)(a). In the case of James F. Kennedy v. Minister of National Revenue 72 DTC 6357 (F.C.T.D.), Cattanach J. commented on the meaning of the terms "winding-up", "discontinuance" and "reorganization" in subsection 81(1) (now subsection 84(2)). At pages 6362 and 6363, he stated the following:
"In section 81(1) the word "reorganization" is used in association with the words "winding-up" and "discontinuance". Both those words contain an element of finality. The company is ended. It is therefore logical to assume that the word "reorganization" presupposes the conclusion of the conduct of the business in one form and its continuance in a different form.
In the Shorter Oxford Dictionary, 3d Ed. at page 1704, the word "reorganization" is defined as a "fresh organization" and the word "reorganize" is defined as "to organize anew".
In the circumstances of the present case there has been no "fresh organization. The same Company continued the same business in the same manner and in the same form. The only difference was that by reason of the sale of its premises the Company operated the same business from the same premises which were rented by it rather than being owned by it.
This was merely the sale by the Company of a capital asset which did not result in the end of the business of the Company. It might have bought other premises from which to carry on its business but it chose to continue its business from the rented premises it had owned formerly. Obviously this would not affect the conduct of its business per se but only the manner in which the Company held the premises in which it conducted its business.
In my view this is not a "reorganization" of the business in a commercial sense nor in the sense of the word contemplated in subsection 81(1)."
On further appeal to the Federal Court of Appeal, the view of Cattanach J that there was no reorganization of the appellant's business was affirmed. (See 73 DTC 5359 at page 5361).
Based on the findings in Kennedy, the internal crystallization of the corporation would not appear to result in a reorganization of its business as contemplated by paragraph 15(1)(a) or subsection 84(2) since the corporation's business would not have been substantially changed in any way. The same company would continue the same business in the same manner and in the same form. In our opinion, the payment of the fees would not either result in a deemed dividend under subsection 84(2) or be excluded from subsection 15(1) by virtue of paragraph 15(1)(a) since the payment was not made in respect of a reorganization of the company's business.
In addition, paragraph 15(1)(a) excludes from subsection 15(1) benefits conferred on a shareholder on a reorganization of the corporation's business. It is our view that a reasonable reading of the words of the provision indicates that it applies only to benefits which a person receives from the actual reorganization of the business and does not refer to a payment made on behalf of a shareholder in connection with the reorganization.
The taxpayer has also argued that, if any benefit was conferred on the shareholder, it was conferred by a redemption, cancellation or acquisition by the corporation of its shares. In our view, a reasonable reading of subsection 15(1) indicates that it applies only to benefits which a person receives from the actual redemption, cancellation or acquisition and does not refer to a payment made on behalf of a shareholder in connection with the redemption, cancellation or acquisition.
Deductibility of expenses by corporation
It is our view that the fees were primarily incurred to enable the shareholder to obtain a personal benefit (that is, access to the capital gains deduction). It is therefore our view that the fees are not deductible from income since they were not laid out to earn income and are therefore denied under paragraph 18(1)(a) or were personal in nature and are therefore denied under paragraph 18(1)(h). The fees would also not meet the requirements of the definition "eligible capital expenditure" because of paragraph (a) of that definition, since their deduction would be denied by a provision other than paragraph 18(1)(b).
for Director
Reorganizations and Foreign Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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