15 December 1995 External T.I. 9530105 - CAPITAL GAIN STRIPS

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:

application of subsection 55(2) to a dividend

Position:

question of fact

Reasons:

		953010
XXXXXXXXXX		T. Harris 

Attention: XXXXXXXXXX

December 15, 1995

Dear Sirs:

Re: Subsection 55(2)

We are writing in response to your letter of November 16, 1995 in which you requested our opinion with respect to the application of subsection 55(2) of the Income Tax Act (the "Act") to the hypothetical situation described in your letter.

As indicated in paragraph 21 of Information Circular 70-6R2, it is not our practice to comment on the tax consequences relating to specific proposed transactions other than in the form of an advance income tax ruling request where the identity of the parties is known and all the facts surrounding the proposed transaction are presented to us. We can, however, provide the following general comments which may be of assistance to you.

Subject to certain specific exceptions, subsection 55(2) applies to a taxable dividend received by a corporation that is deductible under subsection 112(1). In the case of a deemed dividend arising under subsection 84(3) of the Act, subsection 55(2) will apply if the dividend results in a reduction of the capital gain that would otherwise have been realized on a fair market value disposition of the shares of the particular corporation and the gain is attributable to anything other than income earned or realized by a corporation after 1971 (hereinafter referred to as "safe income"). With respect to all other intercorporate dividends, subsection 55(2) will only apply where it may reasonably be considered that one of the purposes of the dividend was the reduction of a capital gain that would otherwise have been realized on a fair market value disposition of the shares of the particular corporation and such gain is not attributable to safe income.

Subsection 55(2) will not apply to the extent that an intercorporate dividend is subject to Part IV tax that is not refunded as part of the series of transactions or events. In addition, subsection 55(2) will not apply where one of the exceptions described in either of paragraphs 55(3)(a) or (b) of the Act is applicable. However, based on the situation described in your letter, it would not appear that either of the exceptions in subsection 55(3) will be applicable.

Consequently, the determination of whether subsection 55(2) will apply to the intercorporate dividends referred to in your letter will depend, inter alia, on whether one of the purposes of the dividend (or in the case of the subsection 84(3) dividend, one of the results) was to effect a significant reduction in the portion of the capital gain that, but for the dividend, would have been realized on a fair market value disposition of any share of capital stock immediately before the dividend, whether such gain may reasonably be considered to be attributable to anything other than the safe income attributable to those shares, and whether any Part IV tax will be payable by the corporate recipient of the dividend.

We trust our comments will be of assistance.

Yours truly,

for Director
Reorganizations and Foreign Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch