30 July 1998 External T.I. 9816165 - CARVE-OUT OF C/G ATTRIB. TO INSUFF. DIV.

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 the Department allows the “carve-out” of that portion of a capital gain attributable to the non-payment of dividends in the case where a rollover under subsection 85(1) of the Act is undertaken to crystallize a capital gains deduction.

Position: The Department has not established any guidelines re: 110.6(8) of the Act.

Reasons: It is a question of fact whether a “significant part of a capital gain is attributable to the fact that dividends were not paid on a share.”

XXXXXXXXXX 	5-981616
		. Gibbons

Attention:  XXXXXXXXXX 

July 30, 1998

Dear XXXXXXXXXX:

We are replying to your letter of June 18, 1998, in which request clarification of the Department’s administrative position with respect to subsection 110.6(8) of the Income Tax Act (the “Act”). More specifically, you enquire whether the Department accepts the “carve-out” of that portion of a capital gain attributable to the non-payment of dividends in the case where a rollover under subsection 85(1) of the Act is undertaken to crystallize a capital gains deduction.

Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R3. The following comments are, therefore, of a general nature only.

In general, subsection 110.6(8) of the Act is an anti-avoidance provision to prevent the conversion of dividend income into exempt capital gains of individuals. This subsection applies if it may reasonably be concluded, having regard to all the circumstances, that a significant part of a capital gain is attributable to the fact that dividends were not paid on a share (other than a prescribed share) or that dividends paid on such a share in the year or in any preceding taxation year were less than 90% of the average rate of return thereon for that year.

In interpreting the phrase “a significant part of the capital gain,” it is our view that the determination of what constitutes a significant part of the capital gain is a question of fact which must be decided in each particular case, having regard, as subsection 110.6(8) of the Act states, to all the circumstances. In this respect, the fact that an individual is crystallizing a capital gains exemption would not, in and by itself, determine whether subsection 110.6(8) of the Act would apply in a particular situation. As regards our opinion of June 25, 1991, which you refer to in your letter, we would caution you that it was given in response to a specific set of circumstances, all of which were considered in reaching a decision at that time.

We trust that these comments will be of assistance.

Yours truly,

J.F. Oulton, CA
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Division

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