19 January 1998 External T.I. 9729855 - DIVIDEND REFUND ARISING FROM DEEMED DIVIDENDS

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:

Will a dividend deemed under paragraph 84.1(1)(b) of the Act be considered a "taxable dividend" for purposes of subparagraph 129(1)(a)(i) of the Act?

Position: Yes.

Reasons:

Paragraph 84.1(1)(b) applies for the purposes of the Act and subsection 89(1) of the Act defines "taxable dividend" to include a "dividend".

972985
XXXXXXXXXX Jim Wilson

Attention: XXXXXXXXXX

January 19, 1998

Dear Sirs:

Re: Dividend Refunds Arising from Deemed Dividends

We are writing in response to your letter of November 5, 1997 wherein you requested our comments with respect to the application of paragraph 129(1)(a) of the Income Tax Act (the "Act"). More specifically, you have described a situation where, as a consequence of a non-arm's length sale of shares by an individual to a corporation resident in Canada ("Holdco"), the provisions of paragraph 84.1(1)(b) of the Act applied to deem a dividend to have been paid to the individual by Holdco. Since Holdco had refundable dividend tax on hand, as that term is defined in subsection 129(3) of the Act, at the end of the year in which the dividend was deemed to have been paid, you wish to know if Holdco would be entitled to a dividend refund.

Pursuant to subsection 89(1) of the Act, a "taxable dividend" is defined to include a “dividend”. Dividends deemed to have been paid "for the purposes of this Act", such as the case with paragraph 84.1(1)(b) of the Act, would constitute a "taxable dividend paid by the corporation on shares of its capital stock in the year" for purposes of subparagraph 129(1)(a)(i) of the Act.

The foregoing comments represent our general views with respect to the subject matter of your letter. As indicated in paragraph 22 of Information Circular 70-6R3, this is not an advance income tax ruling and is therefore not binding on Revenue Canada.

We trust that our comments will be of assistance.

Yours truly,

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