17 March 1997 External T.I. 9621345 - SALE/REDEMPTION OF SHARES BY A U.S. RESIDENT

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:

Tax Consequences Arising From the Sale/Redemption of Shares of a Canadian Corporation Owned by a U.S. Resident

Position:

Deemed dividend pursuant to s. 84(3) subject to Part XIII tax and U.S. will grant a FTC for the Part XIII tax. Any capital gain on both sale and redemption of shares may be taxable in Canada pursuant to Article XIII of the Canada-U.S. Convention.

Reasons:

General reading of relevant provisions of the Act and the Convention

		962134
XXXXXXXXXX	David R. Senécal

Attention: XXXXXXXXXX

March 17, 1997

Dear Sirs:

Re: Disposition of Shares by a U.S. Resident

This is in reply to your facsimile of June 12, 1996, wherein you requested our comments with respect to the taxation in Canada of a U.S. resident and former resident of Canada who has disposed of his shares (both common and preferred) of a corporation resident in Canada (other than a mutual fund corporation) that are not listed on a prescribed stock exchange. We apologize for the delay in responding.

Based on the information that you have provided, it would appear that you have outlined a factual and existing situation which involves a specific taxpayer. As indicated in Information Circular 70-6R3, requests for a written opinion involving a proposed transaction will only be considered in the form of an advance income tax ruling request while inquiries concerning completed transactions should be directed to the appropriate Tax Services Office of Revenue Canada, as responsibility for the review of these transactions lies with such Office. However, we provide the following general comments which may or may not apply to your client and which, in accordance with the above-mentioned Information Circular, are not binding on the Department. In this regard, we are assuming that the shares in question are not shares described in paragraph 3 of Article XIII of the Canada-U.S. Income Tax Convention (the "Convention") but rather constitute property which would otherwise be exempt from tax in Canada under paragraph 4 of Article XIII of the Convention were it not for paragraph 5 of that Article.

As stated in your letter, in a situation where the common shares are repurchased from the U.S. resident by the Canadian corporation (in circumstances other than those described in subsection 84(6) of the Income Tax Act (the "Act")), subsection 84(3) of the Act will deem a dividend to have been paid at that time on a separate class of shares consisting of the shares repurchased to the extent that the amount paid by the corporation for the shares exceeds their paid-up capital. Where a dividend is deemed under Part I of the Act to have been paid to a non-resident, it will be subject to Part XIII tax pursuant to subsection 212(2) of the Act. Where the beneficial owner of the dividend is a resident of the U.S., the 25% statutory tax rate will be reduced in accordance with the provisions of paragraph 2 of Article X of the Convention.

The deemed dividend will be excluded from the proceeds of disposition of the common shares by virtue of the definition of "proceeds of disposition" in section 54 of the Act. Where the adjusted proceeds are such as to result in a capital gain, such gain would continue to be taxable in Canada under paragraph 5 of Article XIII of the Convention. For the same reason, any capital gain realized by the U.S. resident on the sale of the preferred shares to an arm's-length third party would be subject to tax in Canada.

Pursuant to subparagraph 2(c) of Article XXIV of the Convention, the U.S. resident would be allowed a tax credit against his Canadian tax payable in respect of the above-described capital gains for any non-business income tax levied by the U.S. in respect to the those capital gains.

In accordance with paragraph 1 and subparagraph 3(a) of Article XXIV of the Convention the U.S. will, subject to the limitations of its domestic law, be required to grant a foreign tax credit with respect to the Part XIII tax levied by Canada on the deemed dividend arising on the redemption of the common shares.

We trust that the above comments will be of assistance.

Yours truly,

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