14 June 1990 Income Tax Severed Letter ACC9524 - Capital Gains Exemption - Sufficient Dividend Test

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.

We are writing in response to your letter dated May 17, 1990 in which you requested our opinion concerning the application of subsection 110.6(8) of the Income Tax Act (the “Act”) in the following situation outlined in your letter.

Situation1. In 1982 the shares of Opco were rolled into Holco. The main purpose of the transaction was to distribute the retained earnings of Opco prior to the introduction of the Part II corporate distribution tax.

• 2. Each shareholder of Opco received a one common share and one special share of Holdco as consideration for each common share of Opco disposed of.
• 3. No dividends have ever been paid on the special shares.
• 4. There was no attempt to implement an “estate freeze” as apart of the arrangement.

You have suggested that, notwithstanding, the condition Regulation 6205(2)(a)(i), it would appear equitable to allow a deduction under subsection 110.6 of the Act on the disposition of the common shares of “Holco” given that one of the main results of the arrangement was to permit any increase in the value of the property of Holdco to accrue to the common shares, and that the arrangement could have been structured to involve only the issuance of common shares of Holco.

The facts as outlined in your letter appears to involve an actual situation which should be a subject of a request for an advance income tax ruling if a proposed transaction is contemplated. Alternatively, the facts and relevant documentation should be submitted to the appropriate District Office. However, we can offer the following general comments.

The provisions of subsection 110.6(8) of the Act require that in cases where it is reasonable to conclude that having regard to all the circumstances, a significant part of the capital gain from a disposition is attributable to the fact that dividends were not paid on a share, other than prescribed share, no amount shall be deducted under section 110.6 of the Act in computing taxable income for the year.

The share referred to in subsection 110.6(8) of the Act is any share of the corporation and not necessarily the share that was disposed of by the shareholder at the time. Given that in your particular situation, the special shares would not be prescribed shares pursuant to Regulation 6205, it is our opinion that subsection 110.6(8) would apply to deny the deduction claimed under either of subsection 110.6(2), (2.1) or (3) of the Act where a significant part of any capital gain from the disposition of a share is attributable to the non-payment of dividends on the special shares.

The comments expressed are not advance tax rulings are not considered binding on the Department, in respect of any taxpayer, in accordance with paragraph 24 of Information Circular70-6R dated December 18, 1978.

Yours truly,

for Director
Reorganization and Non-Resident Division
Specialty Rulings Directorate
Legislative and Intergovernmental
Affairs Branch

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