6 April 1988 Income Tax Severed Letter RCT 3-1599

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.

Statement of Principal Issue

XXX

Analysis

In order for 183.1 to apply 3 conditions must be met.

• 1. There must be an acquisition of shares to which 84(2) or 84(3) was not applicable,
• 2. consideration must exceed PUC, and
• 3. one of the main purposes was to enable individual shareholders to realize a distribution of corporate surplus as proceeds of disposition.

The issue was previously considered with respect to XXX and the following view was adopted.

"the above transactions in and of themselves would not constitute a "distribution of corporate surplus", as defined for purposes of ... 183.1 ... the better view is that the consideration for the acquisition of the shares would not be considered to have been provided directly or indirectly by XXX based upon the above transactions."

Paragraph 183.1(2)(b) defines a distribution of corporate surplus. Since the conditions described in 2(b) are not present there can be no distribution of corporate surplus and 183.1 will not apply.

However, at the time of the initial opinion, the issue of a subsequent amalgamation or liquidation was not clearly documented.

Finance is of the view that if a subsequent amalgamation or liquidation is planned, then the words "consideration is provided or is to be provided, directly or indirectly in any manner whatever" are broad enough to encompass the proposed amalgamation or redemption. XXX In our view most internal reorganizations which eliminate the "incestuous" shares will clearly result in the consideration being provided by the acquiring corporation. In some cases involving amalgamations, the question is less clear.

Position

As a consequence we adopted the position that if the taxpayer proposes any type of redemption, wind-up, liquidation, amalgamation, or other internal reorganization to cancel the shares (either immediately or in the future) then the consideration is to be provided by the "acquiring corporation" as set out in paragraph 183.1(2)(b) and subsection 183.1(1) will apply.

In the current ruling request, one exception was granted on the basis of the purpose test in 183.1(1)(c). If a future unforeseen change (i.e. none currently pending or proposed) to the applicable corporate law forces the liquidation of the shares, subsection 183.1(1) will not apply. As there was never an intention to liquidate, there was never an intention to provide the consideration, and therefore the purpose was not to enable shareholders to realize a distribution of corporate surplus as proceeds of disposition.