29 August 1990 Income Tax Severed Letter ACC9266 - Addition of Accumulated Profits of a Subsidary to Accumulated Profits of Parent

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.

901765
                      24(1)                         S. Shinerock
                                                    (613) 957-2108

                              19(1)

Attention:

August 29, 1990

Dear Sirs:

Re: (1) Notice of Ways and Means Motion of November 24, 1989 (2) Subsection 55(2) of the income Tax Act (the "Act")

We refer to your letter of August 1, 1990 in which you requested a technical interpretation on the application of the Notice of Ways and Means Motion that was tabled in the House of Commons on November 24, 1989 (the "Ways and Means Motion"), and the application of subsection 55(2) of the Act to the situation described below.

                          24(1)

                              24(1)

                                                    In this       
connection, you understand that the expression "accumulated
profits" means accounting profits computed on a consolidated basis
with investments accounted for on a cost basis.  You refer to the
Department's response to Question 10 on page 10:15 of the 1987
Corporate Management Tax Conference Report in support of your
understanding.

A related question asked by you concerns the application of subsection 55(2) of the Act to:

                               24(1)        

Comments

It appears your request relates to a specific proposed transaction. Confirmation of the tax consequences of a specific proposed transaction will only be provided in response to a request for an advance income tax ruling. The procedures for requesting an advance ruling are set out in information Circular 70-6R. We are, however, able to provide the following general comments in response to your enquiry.

Provided that the Ways and Means Motion is enacted as tabled in the House of Commons on November 24, 1989.

                       24(1)                                      
                  However, we so not agree that "accumulated
profits" means accounting profits computed on a consolidated basis
with investments accounted for on a cost basis.  As indicated in
our response to Question 8 on page 10:14 of the 1987 Corporate
Management Tax Conference Report, accumulated profits means
accounting profits computed on an unconsolidated basis with
investments accounted for on a cost basis.  Accumulated profits of
a subsidiary cannot, therefore, be added to the accumulated profits
of the payer (parent) for the purposes of determining the amount of
interest that may be deductible by the parent.

Your reference to the Department's response to Question 10 in the 1987 Corporate Management Tax Conference Report is not fully understood. Our understanding of the response is that it was intended to distinguish between that portion of a subsection 84(3) dividend which constituted a return of paid-in capital, and the remaining portion of such dividend which would be paid out of accumulated profits, in that for the purposes only of the Ways and Means Motion, subparagraph l(b)(i) of the Ways and Means Motion would apply to the portion of the dividend which relates to the return of paid-in capital, while subparagraph l(a)(i) of the Ways and Means Motion would be applicable to the portion of the dividend paid out of accumulated profits.

                              24(1)

Note that subsection 248(10) of the Act deems a reference to a series of transactions or events to include any related transactions or events completed in contemplation of the series. Consequently, the subsection 84(3) dividend would not be subject to subsection 55(2) of the Act only if it was paid out of "income earned or realized ... after 1971 and before the transaction or event or the commencement of the series of transactions or events referred to in paragraph (3) (a)..." ("safe income") of, 24(1) in respect of the holder of the shares who was deemed to have receive the dividend.

Finally, if a dividend was deemed to have been paid by 24(1) pursuant to subsection 84(l) of the Act, or if a cash dividend we were paid by 24(1) then either such dividend would not be subject to the provisions of subsection 55(2) of the Act only if either such dividend were paid out of safe income of 24(1) or if either such dividend did not come within the purpose test set out in subsection 55(2) of the Act.

As stated in paragraph 24 of information Circular 70-6R dated December 8, 1978, the opinions expressed in this letter are not rulings and are consequently not binding on the Department.

Yours truly,

for Director Reorganizations and Non-Resident Division Rulings Directorate Legislative and intergovernmental Affairs Branch