2096 Internal T.I. 9532237 - CONFERRING A BENEFIT ON UTIMATE NONRESIDENT PARENT

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.

DOCUMENT TYPE:

Tax Services Office Memo

Principal Issues: Under what provisions of the Act can a benefit conferred on the ultimate non-resident parent company by a Canadian company (Opco) which shares are held by another Canadian company (Holdco) be assessed with respect to overpayment of inventory purchase price?

Position: Five alternatives were suggested:

1) subsections 15(1), 214(3) and 212(2)
2) subsection 246(1) at Holdco's level
3) subsection 246(1) at Opco's level
4) subsection 56(2) at Holdco's level
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Reasons: see document file

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GAAR: N/A
FINANCE: N/A REVIEW: N/A
JURISPRUDENCE: David Smith (93 DTC 5351) ; Simon-Carves (89 DTC 98); and Indalex (88 DTC 6053)

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HEADER DOCUMENT KEY: 7
HEADER DATABASE: 1

HEADER SUBJECT LINE:

Conferring a Benefit to Ultimate Nonresident Parent
HAA NUMBER: HAA 7761-1

						XXXXXXXXXX, 1996

Chief of Audit				Foreign Section
XXXXXXXXXX Tax Services Office	XXXXXXXXXX

Attention: XXXXXXXXXX
						953223

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Subsections 15(1), 56(2) and 246(1)
of the Income Tax Act (the "Act")

THIS DOCUMENT CONTAINS ADVICE OR RECOMMENDATIONS DEVELOPED BY A GOVERNMENT DEPARTMENT AND AN ACCOUNT OF CONSULTATIONS OR DELIBERATIONS INVOLVING OFFICIALS OF A GOVERNMENT DEPARTMENT AND IS THEREFORE CONSIDERED TO BE EXEMPT FROM DISCLOSURE UNDER SUBSECTION 21(1) OF THE ACCESS TO INFORMATION ACT.

We are writing in response to your memorandum of XXXXXXXXXX wherein you requested our opinion as to the best method to assess the alleged benefit in the following situation. We apologize for the delay in replying.

The facts of the situation are as follows:

.XXXXXXXXXX is a corporation incorporated and operating in XXXXXXXXXX.

.XXXXXXXXXX, a XXXXXXXXXX corporation, is controlled by XXXXXXXXXX.

.XXXXXXXXXX ("Holdco") is a corporation incorporated in Canada. XXXXXXXXXX owns all the Class B shares of Holdco and XXXXXXXXXX owns all the Class A shares and preferred shares of Holdco.

.Holdco owns 100% of XXXXXXXXXX ("Opco") which was incorporated and operates in Canada.

.Opco purchased XXXXXXXXXX from XXXXXXXXXX for purchase prices in excess of the fair market value of XXXXXXXXXX.

.Your office has applied subsection 69(2) of the Act to Opco to disallow the deduction of the amount by which the purchase price of XXXXXXXXXX exceeded the fair market value thereof.

Our Comments

Based on the limited information we have with respect to the situation described above, XXXXXXXXXX has received a benefit through the appropriation of funds for inadequate consideration from the Canadian group of companies. On a consolidated basis, a portion of the surplus of Holdco and Opco has been distributed to XXXXXXXXXX without the payment of Part XIII tax. We feel that you have five alternatives to assess the benefit as follows:

You may consider applying subsection 15(1), paragraph 214(3)(a) and subsection 212(2) of the Act to XXXXXXXXXX such that XXXXXXXXXX would be deemed to have received a dividend from a corporation resident in Canada on which tax under Part XIII of the Act would be exigible.

You may consider applying paragraph 246(1)(b) of the Act at Holdco's level such that the amount of the benefit would be deemed for the purposes of Part XIII of the Act to be a payment made by Holdco to XXXXXXXXXX in respect of a dividend.

You may consider applying paragraph 246(1)(b) of the Act at Opco's level such that the benefit conferred by Opco on XXXXXXXXXX would be deemed for the purposes of Part XIII of the Act to be a payment made by Opco to XXXXXXXXXX in respect of a dividend.

You may consider applying subsection 56(2) of the Act to include in computing the income of Holdco the amount of the benefit.

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First Alternative

Under alternative (a), it could be argued that Holdco, being the sole shareholder and controller of Opco, has indirectly conferred a benefit on XXXXXXXXXX by having its subsidiary, Opco, confer a benefit directly on XXXXXXXXXX.

It is clear that XXXXXXXXXX has received a benefit and it is our view that a reasonable argument can be made that a benefit can be conferred directly or indirectly under subsection 15(1) of the Act. XXXXXXXXXX.

Moreover, if subsection 56(2) of the Act could be successfully applied to Holdco as discussed in the fourth alternative below in that it could be argued that Holdco desired to have a benefit conferred on XXXXXXXXXX, a shareholder of Holdco, subsection 15(1) of the Act should apply at Holdco's level.

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Since a benefit can be conferred indirectly, it is our view that Holdco could be said to have conferred a benefit indirectly on its shareholder, XXXXXXXXXX, through Opco such that subsection 15(1) of the Act would apply. By virtue of paragraph 214(3)(a) of the Act, XXXXXXXXXX would be deemed to have received a dividend from a corporation resident in Canada which dividend would be subject to the application of subsection 212(2) of the Act.

Second Alternative

XXXXXXXXXX. Subsection 246(1) of the Act clearly states that a benefit can be conferred directly or indirectly (in this case we can say that Holdco conferred a benefit on XXXXXXXXXX indirectly through Opco). Also it appears that all the conditions described in the preamble of that subsection are met (i.e., the amount of the benefit received by XXXXXXXXXX was not otherwise included in computing its taxable income earned in Canada under Part I of the Act and would be included in XXXXXXXXXX income if the amount of the benefit were a payment made directly to it and if it were resident in Canada). If XXXXXXXXXX were resident in Canada and if Holdco had directly made a payment to XXXXXXXXXX, the amount of the benefit would have been included in XXXXXXXXXX income under subsection 15(1) of the Act. We feel that in substance the amount of the benefit conferred by Holdco to XXXXXXXXXX is equivalent to Holdco paying a dividend to XXXXXXXXXX. Consequently, it could be argued that paragraph 246(1)(b) of the Act would apply such that the amount of the benefit would be deemed for purposes of Part XIII of the Act to be a payment made by Holdco to XXXXXXXXXX in the nature of a dividend.

Third Alternative

Alternatively it can be argued that Opco conferred a benefit directly on XXXXXXXXXX such that subsection 246(1) of the Act is applicable. It appears that all the conditions described in the preamble of that subsection are met. The amount of the benefit was not otherwise included by XXXXXXXXXX in computing its taxable income earned in Canada under Part I of the Act and would be included if the amount of the benefit were a payment made directly to it by Opco and if it were resident in Canada. If XXXXXXXXXX were resident in Canada, the amount of the benefit included in the selling price of XXXXXXXXXX would no doubt be included in its income under Part I of the Act. As to the nature of the benefit, we feel that the portion of the purchase price of XXXXXXXXXX in excess of their fair market value represents a strip of Opco's surplus. Consequently, it could be said that paragraph 246(1)(b) of the Act would apply such that the amount of the benefit would be deemed for purposes of Part XIII of the Act to be a payment made by Opco to XXXXXXXXXX in the nature of the payment of a dividend.

Fourth Alternative

XXXXXXXXXX, your fourth choice (alternative (d)) is to apply subsection 56(2) of the Act to Holdco because

there was a payment or transfer of property to XXXXXXXXXX;

it could be said that such payment or transfer of property was pursuant to the direction of or with the concurrence of Holdco because Holdco was the controlling shareholder of Opco and as such Holdco should have known that Opco has conferred a benefit directly on XXXXXXXXXX;

it could be argued that the payment or transfer of property to XXXXXXXXXX was made as a benefit that Holdco desired to have conferred on XXXXXXXXXX;

the payment or transfer of property would be included in computing Holdco's income had it been made to Holdco (by virtue of subsection 15(1) of the Act as Holdco is the shareholder of Opco); and

the amount of the benefit was not otherwise taxed in the hand of XXXXXXXXXX in Canada.

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However, by applying subsection 56(2) of the Act to Holdco, there would not be any deemed dividend to XXXXXXXXXX and you would not be able to tax XXXXXXXXXX, the recipient of the benefit, under Part XIII of the Act (i.e. the tax would be on the wrong taxpayer, Holdco). Therefore, alternative (d) should only be used when none of alternatives (a), (b) or (c) work. In addition, if subsection 56(2) of the Act could be successfully applied, the same arguments used in applying that subsection could be used to support alternatives (a) and (b) with respect to Holdco conferring a benefit indirectly on XXXXXXXXXX.

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Summary

In summary, because a quantifiable benefit has been conferred to XXXXXXXXXX, it is our view that subsection 69(2) of the Act would apply to reduce the cost of XXXXXXXXXX purchased by Opco from XXXXXXXXXX to their fair market value, resulting in a disallowance of the deduction of the amount by which the purchase price of XXXXXXXXXX exceeded their fair market value.

Subsection 15(1), paragraph 214(3)(a), and subsection 212(2) of the Act could apply to deem a dividend to have been paid to XXXXXXXXXX by Holdco such that Part XIII tax would be required to be withheld and remitted by Holdco at the reduced rate under the Canada-XXXXXXXXXX Income Tax Convention.

Alternatively, paragraph 246(1)(b) of the Act could apply to XXXXXXXXXX such that the amount of the benefit conferred on XXXXXXXXXX indirectly by Holdco or directly by Opco, as the case may be, would be deemed to be a payment made by Holdco or Opco, as the case may be, to XXXXXXXXXX for purposes of Part XIII of the Act in the nature of a dividend.

Subsection 56(2) of the Act could also apply to include in computing the income of Holdco under Part I of the Act the value of the benefit conferred on XXXXXXXXXX.

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

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