7 June 1989 Income Tax Severed Letter AC73879 - Intercorporate 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.

June 7, 1989

 CALGARY DISTRICT OFFICE                  HEAD OFFICE
 G.C. Hoard                               Rulings Directorate
 Chief of Audit                           Resource Industries
                                            Section
                                          Allan B. Nelson
                                          (613) 957-8984
 Attention: L.A. Dunnigan
            Large File Case Manager
            Room 432

Subject:  24(1)                            7-3879
        dated November 17, 1986 (the "Ruling")

In your memo of May 2, 1989, reference is made to paragraph 18(b)
on page 6 of the Ruling wherein it states                 24(1)

In a meeting with you were informed by them that a Rulings officer had verbally advised them that subsection 55(2) would have no application to the transactions in question.

District Office Query

You have asked us to advise you whether subsection 55(2) would have application to the transactions referred to in the Ruling. Background. We have reviewed 24(1) proposed transactions as described in the Ruling in light of the possible application of subsections 55(2) of the Act. Particular attention was paid to the exemption provisions of subparagraph 55(3)(a)(ii) of the Act.

Our response to your query will be based on the following assumptions:

1. That all parties agree that subsection 55(2) would otherwise apply to the particular transactions if the Act were read without paragraph 55(3)(a); and

2. That the proposed transactions in the ruling proceeded substantially in the form outlined, therein.

Facts

The following is a brief outline of the relevant facts. For a more detailed discussion thereof, reference is made to the Ruling:

(i) (ii) (iii) 24(1) (iv) (v)

Rulings' Opinion

Subsection 55(2) of the Act will be applicable in the above described instance.

Since the transactions involve a disposition of property between non-arm's length parties 24(1) are all related pursuant to subsections 251(2) and (3) of the Act, the transactions will not come within the provisions of subparagraph 55(3)(a)(i) of the Act.

However, the public shareholders of 24(1) which presumably deal at arm's length with 24(1) will acquire, albeit indirectly, a significant increase in their interest in 24(1). This increase in interest is within the provisions of subparagraph 55(3)(a)(ii) of the Act and therefore, subsection 55(2) of the Act would not be applicable to the dividend noted in fact (iii) above.

To arrive at this conclusion, we look through 24(1) to its owners, including the arm's length public shareholders. As the Act appears to be silent on this matter, we consider the phrase "interest in any corporation" in subparagraph 55(3)(a)(ii) to include direct or indirect interest.

With respect to 24(1) statement that Rulings had advised them verbally that subsection 55(2) of the Act would not be applicable in this instance, we have no knowledge of that advice being given and, therefore, cannot comment further.

If you have any further queries on this matter please contact the writer.

Chief Resource Industries Section Bilingual Services & Resource Industries Division Rulings Directorate