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: no new issues, general comments provided
Position:
Reasons:
XXXXXXXXXX 5-982974
D. Yuen
Attention: XXXXXXXXXX
November 26, 1998
Dear Sirs:
Re: Section 84.1 of the Income Tax Act
We are writing in response to your letter of November 9, 1998 wherein you requested our comments on the following situation. All legislative references are to provisions of the Income Tax Act R.S.C. 1985 (5th Supp.) c. 1, as amended (the “Act”).
Situation
1. A and B are father and son.
2. A and B own 80% and 20% of Opco, a small business corporation, which has the meaning assigned by subsection 248(1).
3. A sells his 80% interest in Opco to B and claims the capital gain deduction under section 110.6. As consideration, A receives an interest-bearing demand promissory note (the “Note”).
4. At some time in the future, B transfers all of his shares of Opco to his wholly-owned corporation, Holdco. The consideration for the transfer is the assumption of the Note by Holdco.
1. Since the transaction described in paragraph 3 above is between individuals, it is your view that the provisions of section 84.1 will not be applicable.
2. Since the transaction described in paragraph 4 above is a non-arm’s-length sale of shares, it is your view that the provisions of section 84.1 will apply to deem B to have received a dividend if B receives non-share consideration from Holdco in excess of the paid-up capital of the shares so transferred. Paid-up capital, as used here and subsequently, has the meaning assigned by subsection 89(1).
3. You are concerned that the provisions of section 84.1 may also apply to the sale of the Opco shares by A to B described in paragraph 3 above. You have also queried whether the time that the transfer to Holdco takes place in relation to the sale of the Opco shares by A to B would be a factor in determining whether section 84.1 will apply to the sale by A to B.
1. It is our view that the provisions of section 84.1 will not apply to the sale of the Opco shares by A to B since the sale is between individuals.
2. It is our view that, provided B receives non-share consideration in excess of the paid-up capital of the Opco shares transferred to Holdco, a dividend will be deemed to have been received by B by virtue of paragraph 84.1(1)(b).
3. The provisions of section 84.1 would not appear to apply to the sale of the Opco shares by A to B as a result of the sale of those shares by B to Holdco, provided that B acquired the Opco shares on his own account and not as an agent of either A or Holdco. Paragraph 25 of Information Circular IC 88-2 discusses the situation where, as a result of a series of transactions, a shareholder realizes a capital gain on the disposition of property that should have been accounted for as a dividend. Where one of the transactions in a series of transactions is an avoidance transaction, within the meaning of subsection 245(3), subsection 245(2) may be applied to the transaction if it is determined that the series of transactions was carried out to thwart the purpose of the provision in question. In the situation outlined above, it is possible that the sale by B to Holdco forms part of a series of transactions or events, within the meaning of subsection 248(10), that includes the initial sale of the Opco shares by A to B. We are unable to comment on whether the provisions of subsection 245(2) would be applicable in respect of the above situation as such a determination depends on the facts and circumstances of a particular situation.
4. In addressing the situation described above, no consideration has been given to the income tax implications, if any, with respect to any previous transaction that may be part of the series of transactions that includes the transactions described above. Also, no consideration has been given to provisions of the Act other than those referred to above.
These comments are provided in accordance with the guidelines set out in paragraph 22 of Information Circular IC 70-6R3 dated December 30, 1996 issued by Revenue Canada and are not considered binding on Revenue Canada.
Yours truly,
for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
.../cont’d
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