6 June 1997 External T.I. 9713525 - connected corporations

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:

Whether dividend payer must be connected with recipient at the time the dividend is received

Position:

Yes

Reasons:

186(4)(b)

Attention: XXXXXXXXXX

Dear Sirs:

Re: Connected Corporations - Part IV Tax

We are writing in response to your letter of April 11, 1997 wherein you requested our interpretation as to whether Part IV tax would be exigible with respect to a dividend received by a corporation in the following circumstances:

Corporation A is a private corporation which owns more than 10% of the issued and outstanding shares of Corporation B. No other classes of shares have been issued by Corporation B such that Corporation B is connected with Corporation A pursuant to paragraph 186(4)(b) of the Income Tax Act (the "Act").

Prior to the end of its fiscal period, Corporation A sells some of its shares of Corporation B with the result that Corporation B is no longer connected, for the purposes of Part IV of the Act, with Corporation A. Subsequent to the sale of some of Corporation B's shares but prior to the end of its fiscal period, Corporation B pays a dividend to its shareholders, including Corporation A.

You believe that the dividend received by Corporation A from Corporation B is not subject to Part IV tax since Corporation B is connected with Corporation A in the year that the dividend is received.

Our Comments

Paragraph 186(1)(a) of the Act provides that Part IV tax is payable in respect of "all assessable dividends received by the particular corporation in the year from corporations other than payer corporations connected with it...".

Paragraph 186(4)(b) refers to a payer corporation being connected with the particular corporation at any time where:

"(b) the particular corporation owned at that time

(i) more than 10% of the issued share capital (having full voting rights under all circumstances) of the payer corporation, and

(ii) shares of the capital stock of the payer corporation having a fair market value of more than 10% of the fair market value of all of the issued shares of the capital stock of the payer corporation, (underlining added)".

Consequently, it is our view that Part IV tax is exigible pursuant to paragraph 186(1)(a) of the Act with respect to any assessable dividend received by a particular corporation from a corporation which is not connected with it at the time the dividend is received. The fact that the corporation which paid the dividend may have been connected with the recipient at some other time during the recipient's taxation year would not be relevant.

We trust these comments will be of assistance.

Yours truly

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