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 paragraph 55(3)(a) applies to a particular series of transactions
Position:
Yes
Reasons:
- Mr. Father is related to Opco and will be related to Investco by virtue of being its incorporator. Therefore, the increase in interest in Investco by Mr. Father is not an event described in 55(3)(a)(ii) or (v).
- Mr. Father is related to each child. Therefore, Opco and Investco will be related to each child and to the family trust under 55(5)(e)(ii).
Therefore, the increase in interest in Opco by the family trust is not an event described in 55(3)(a)(ii) or (v)
XXXXXXXXXX 980142
F. Francis
Attention: XXXXXXXXXX
November 10, 1998
Dear Sirs:
Re: Paragraph 55(3)(a) of the Income Tax Act (the "Act")
This is in reply to your letter of January 6, 1998, wherein you requested a technical interpretation as to the application of paragraph 55(3)(a) to the following hypothetical situation:
- Mr. Father owns all the issued and outstanding shares of Opco, a Canadian-controlled private corporation. Mr Father wants Opco to qualify as a "small business corporation", as that term is defined in the Act, by removing the investment assets from Opco.
- Mr. Father incorporates a new company, Investco.
- Mr. Father will transfer common shares of Opco (with a value equivalent to the value of the investment assets) to Investco electing under subsection 85(1) of the Act and taking back as consideration, Investco preferred shares with a redemption value equal to the value of the common shares.
- Opco will transfer the investment assets to Investco electing under subsection 85(1) of the Act and taking back as consideration, Investco preferred shares with a redemption value equal to the value of the investment assets.
- Opco will repurchase its common shares from Investco.
- Investco will redeem its preferred shares held by Opco.
- The debt arising on the cross redemptions will be cancelled in satisfaction of each other.
- Mr. Father will now be the sole shareholder of the two companies, Opco and Investco, which will hold active assets and investment assets respectively.
It is your view that, in the above-described situation, the dividends arising on the cross-redemptions will generally be exempt from the application of subsection 55(2) of the Act by virtue of the application of paragraph 55(3)(a).
You question whether the subscription of shares of Opco by a discretionary family trust established for the benefit of Mr. Father's minor children would result in the dividends being subject to the application of subsection 55(2) of the Act. You assert that, under subparagraph 55(5)(e)(ii) of the Act, the family trust will be related to Investco and Opco. Your specific concern is whether we would consider the beneficiary children to have acquired an interest in the dividend payer such that the transaction is not exempt from subsection 55(2) of the Act. You note that the children are deemed to be unrelated parties under subparagraph 55(5)(e)(i) of the Act.
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. However, we can offer the following comments which we hope will be of assistance to you.
We note that the term "unrelated person" is defined in paragraph 55(3.01)(a) to mean a person (other than the dividend recipient) to whom the dividend recipient is not related. In the series of transactions that you have outlined, the dividend recipients will be Opco and Investco. Opco and Investco are both related to Mr. Father by virtue of subparagraph 251(2)(b)(i) of the Act. Further, Mr. Father is related to each of his children by virtue of paragraph 251(2)(a) of the Act. Consequently, under subparagraph 251(2)(b)(iii) of the Act, Opco and Investco will be related to each child and, under subparagraph 55(5)(e)(ii), Opco and Investco will be related to the family trust (assuming that the only beneficiaries of the trust are Mr. Father's children). As a consequence thereof, the subscription of shares of Opco by the family trust will not result in an event described in subparagraph 55(3)(a)(ii) or 55(3)(a)(v) of the Act.
We trust our comments will be of assistance to you.
Yours truly,
for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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