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: Application of paragraph 55(3)(a)
Position: Explained conditions under which paragraph 55(3)(a) applies
Reasons: See text of document
XXXXXXXXXX 982354
D. Boychuk
Attention: XXXXXXXXXX
January 21, 1999
Dear XXXXXXXXXX:
Re: Application of Section 55
We are writing in response to your letter of September 8, 1998 wherein you requested our views on the application of section 55 of the Income Tax Act (the “Act”) to the situation described therein.
In your letter, you have outlined what appears to be an actual fact situation related to transactions and events which have taken place. The review of such situations is generally the responsibility of the local taxation services offices and, as outlined in paragraph 22 of Information Circular 70-6R3, it is not our practice to provide specific opinions on factual situations otherwise than in the context of an advance income tax ruling. In any event, a request for an advance income tax ruling cannot be considered where the transactions are completed or where the issues involved are primarily questions of fact. Nevertheless, we are prepared to provide the following comments which we hope will be of assistance.
1. Subsection 55(2) will not apply to a dividend in excess of the safe income on hand attributable to a share provided there are no transactions or events which are described in any of subparagraphs (i) to (v) of paragraph 55(3)(a) which are part of the series of transactions or events in which the dividend is received. In this respect, we note that:
(i) brothers and sisters are deemed not to be related to each other by virtue of subparagraph 55(5)(e)(i);
(ii) subject to subsection 55(4), if two corporations are related to the same corporation, they will be deemed to be related to each other by virtue of subsection 251(3); and
(iii) there will be a significant increase in the total direct interest in any corporation within the meaning of subparagraph 55(3)(a)(ii) where an “unrelated person” subscribes for the shares of a new corporation or acquires shares of a corporation (which represent a significant proportion of the outstanding shares of the corporation or a significant dollar value) in consideration for the transfer of property (other than corporate shares disposed of for proceeds of disposition that are not less than their fair market value) to the corporation.
2. Where a common share is exchanged for a preferred share, the preferred share is entitled to the same proportion of safe income that could have been paid as a safe dividend on the common share immediately before the exchange. Subsequent to the exchange, safe income may accrue on the preferred share only to the extent of the dividend entitlement attached to the share.
3. The safe income entitlement of a particular class of shares will not be affected by the redemption of another class of shares provided the redemption of the other class of shares does not reduce the fair market value of the particular class of shares and provided the redemption is not part of a plan to avoid tax.
4. Safe-income determination time for a transaction or event or a series of transactions or events is defined in subsection 55(1) to be the earlier of the time immediately after the earliest disposition or increase in interest described in any of subparagraphs 55(3)(a)(i) to (v) and the time that is immediately before the earliest time that a dividend is paid as part of the transaction, event or series. Where a deemed dividend resulting from the redemption of a class of shares precedes the payment of a dividend on another class of shares and the redemption is part of the series of transactions which includes the payment of the dividend, the safe-income determination time for the series of transactions or events would be no later than the time immediately before the deemed dividend arising on the redemption.
We trust that our comments will be of assistance.
The above comments represent our general views with respect to the subject matter of your letter and are provided in accordance with paragraph 22 of Information Circular 70-6R3.
Yours truly,
for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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