31 October 1997 External T.I. 9728595 - INCREASE IN INTEREST

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.

972859
XXXXXXXXXX T. Harris
(613) 957-2114

Attention: XXXXXXXXXX

October 31, 1997

Dear Sirs:

This is in reply to your letter dated October 16, 1997, in which you requested our comments concerning the application of the proposed amendments to paragraph 55(3)(a) of the Income Tax Act (the "Act") which were contained in Bill C-69. The facts, in brief, involve a Canadian corporation ("Canco"), the common shares of which are owned by three shareholders as follows:

	Parent	35%
	Child	 	30%
	Stranger		35%

Parent & Child are related to each other, while Stranger is not related to either of Parent or Child.

Canco owns certain real estate which has appreciated in value. Canco would like to carry out a divisive reorganization to transfer the real estate to a newly incorporated corporation ("Newco"), the shares of which will be owned by Parent, Child and Stranger in the same proportion as their shareholdings in Canco. The proposed divisive reorganization will involve the receipt by Canco of a deemed dividend under subsection 84(3) on the redemption of preferred shares of Newco which will be issued to Canco as consideration for the transfer of the real estate to Newco.

The situation described in your letter would appear to involve an actual proposed transaction. Assurance as to the tax consequences of actual proposed transactions will only be given in the context of an advance income tax ruling. The procedures for requesting an advance income tax ruling are outlined in Information Circular 70-6R3 dated December 30, 1996 issued by Revenue Canada, Customs, Excise and Taxation. However, we can offer the following comments which we hope will be of assistance to you.

It is our view that the series of transactions described above will include the acquisition by Stranger of a significant increase in his total direct interest in Newco. Since Stranger is not related to Canco, the dividend recipient, Stranger will be an unrelated person within the meaning of proposed paragraph 55(3.01)(a) of the Act. Consequently, an event described in proposed subparagraph 55(3)(a)(ii) will occur as part of the series of transactions or events which includes the dividend received by Canco and paragraph 55(3)(a) will not apply to exempt the dividend from the provisions of subsection 55(2) of the Act.

Our views would not be affected if, as part of the series, Stranger was to sell his shares of Newco to any of Parent, Child or an unrelated third party.

The foregoing comments represent our general views with respect to the subject matter of your letter. These comments are provided in accordance with the guidelines described in paragraph 22 of the aforementioned Information Circular.

Yours truly,

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