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: Multiple distributions on winding-up a corporation
Position: Only the last distribution qualifies for the 88(2) treatment
Reasons: Wording of the Act
5-952054
XXXXXXXXXX V. Plant
(514) 957-8953
Attention: XXXXXXXXXX
October 26, 1995
Dear Sirs:
Re: Winding up of a corporation
This is in reply to your letter of August 3, 1995, referring to your letter of May 17, 1995 wherein you request a technical interpretation in respect of section 88 of the Income Tax Act (the "Act"). Your questions are in the context of the following hypothetical circumstances.
1.We are to assume that a Canadian corporation ("Opco") has a pre-1972 capital surplus on hand ("CSOH") of $500,000.00 and does not have any capital dividend account. We are to further assume that the assets of Opco consist solely of four term deposits, each in the amount of $200,000.00. The first term deposit matures on July 31, 1995 and the rest become due at successive one month intervals (ie. August 31st, September 30th and October 31st, 1995). Opco has no liabilities.
2.On May 31st, 1995, the shareholders of Opco (assuming more than one and that the conditions of subsection 88(1) are not met) approve a resolution calling for the liquidation and winding-up of Opco and that in furtherance thereof that the company distribute to the shareholders all the assets of Opco.
3.In furtherance of such resolution, the board of directors as each term deposit matures declares a dividend of $200,000 (ie. on July 31, 1995, August 31, September 30 and October 31) thus distributing all the assets of the company by October 31, 1995.
4.Opco on November 1, 1995 files Articles of Dissolution applying for its Certificate of Dissolution and subsequently obtains its certificate.
Your questions
5.Will the aggregate amount of $800,000 which was distributed as a dividend over a four month period be treated as property which has been distributed or otherwise appropriated in any manner whatever to or for the benefit of the shareholders on the winding-up under subsection 84(2) of the Act, such that Opco will be deemed to have paid a dividend for purposes of subsection 84(2) of the Act equal to $800,000?
6.Will subsection 88(2) of the Act apply to the full amount of $800,000 which is dividended out by Opco or will subsection 88(2) of the Act apply simply to the last dividend of $200,000 declared and paid on October 31, 1995?
7.We are asked to confirm that to the extent that subsection 88(2) of the Act applies to the full amount of $800,000, then under paragraph 88(2)(b) of the Act $500,000 (ie. an amount equal to the pre-1972 capital surplus on hand) out of the $800,000 of dividend distributions should be treated for purposes of the Act as not constituting a dividend and therefore under section 54 of the Act will constitute proceeds of disposition. The balance of the dividend distributions in the amount of $300,000 should be treated as a taxable dividend.
8.You are requesting our comments if the shareholders were non-residents of Canada. You are presuming that Opco would withhold under Part XIII of the Act 25% (unless reduced by treaty) of the total dividend distributions minus the pre-1972 capital surplus on hand (in this case there would be 25% withholding on $300,000), and Opco would withhold (subject to the issuance of a section 116 certificate) 33 1/3% on the portion of the dividend distributions equal to the pre-1972 capital surplus on hand pursuant to subsection 116(5) of the Act.
9.You would like to know if our comments would be any different if the shareholders of Opco only adopt the liquidation and winding-up resolution on October 5, 1995 after the first 3 dividends of $200,000 each have been declared.
It appears that the interpretation you seek relates to a proposed transaction to be undertaken by specific taxpayers and, therefore, we bring to your attention Information Circular 70-6R2 dated September 28, 1990 and the Special Release thereto dated September 30, 1992, issued by Revenue Canada, Customs, Excise and Taxation. Confirmation with respect to proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. Where, however, the issue to be considered involves a question of fact, the Department will not rule unless all of the relevant facts are known. Nevertheless, we can offer the following general comments.
Paragraph 2 of Interpretation Bulletin IT-126R2 states that "(s)ubsection 84(2) applies to a distribution by, or appropriation of funds or property of, a corporation resident in Canada to, or for the benefit of, its shareholders where any positive steps are taken towards the winding-up, discontinuance or reorganization of its business. Thus circumstances falling short of the dissolution of a corporation may result in the application of the subsection. However, since the business of a corporation depends upon its corporate existence, where any positive step is taken toward the formal dissolution of the corporation, it is considered to be winding-up or discontinuing its business as well." Consequently, it is our opinion that each of the distributions referred to in your hypothetical situation would be a distribution in the course of winding up the corporation for the purposes of subsection 84(2) of the Act.
As stated in paragraph 1 of Interpretation Bulletin IT-149R4, subsection 88(2) of the Act does not require that there be a single distribution of property on winding-up. However, where there is a series of distributions in the course of winding-up, subsection 88(2) of the Act usually applies to the last such distribution, when it can be said that all or substantially all of the property owned immediately beforehand has been distributed to the shareholders. It is the Department's general position that "all or substantially all" of a corporation's property has been distributed to its shareholders if 90% of its property has been so distributed. In the above hypothetical situation, this would occur when the fourth distribution is made, at which time subsection 88(2) of the Act would apply. By virtue of sub-paragraph 88(2)(b)(ii) of the Act, the $500,000 balance of pre-1972 CSOH available gives the result that the $200,000 dividend on the fourth distribution would be deemed not to be a dividend, but would constitute proceeds of disposition.
In the event that the shareholders are non-residents, the first three distributions of $200,000 would be subject to tax under Part XIII of the Act. The fourth distribution of $200,000 would be subject to the rules of section 116, given that it represents proceeds of distribution.
If the shareholders of Opco only adopt the liquidation and winding-up resolution on October 5, 1995 after payment of the first three dividends of $200,000, we are of the opinion that all four distributions may still be governed by subsection 84(2) of the Act, since it appears that they are being made in the course of the winding-up, discontinuance or reorganization of the corporation's business, despite the fact that they are paid prior to the adoption of the winding-up resolution. In this situation subsection 88(2) would again apply only to the fourth distribution.
We trust you will find our comments helpful.
Yours truly,
for Director
Reorganizations and Foreign Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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