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.
This memorandum is in reply to yours dated October 25, 1979 concerning the above-mentioned taxpayer. We apologize for the delay in our reply.
The facts as we understand them are as follow:
You ask us to review the matter and to advise you if this is a case of dividend stripping, based upon strictly technical considerations as there was no attempt to disguise the facts, except perhaps by overvaluing the adjusted cost base.
Our comments are as follows:
Subsection 247(1) of the Income Tax Act deals with the type of tax avoidance known as "dividend stripping" whereby, as a result of a transaction, assets of a corporation are, or can be, moved from the corporation into the hands of a taxpayer without payment of the hole or any part of the tax that would otherwise have been payable on a distribution of income of a corporation. To apply subsection 247(1) of the Act, we must prove that the fair amount of tax has not been paid for the amount received.
In this case, since the elected amount under 83(1) in respect of the dividend paid exceeds the combined balance in TPUS plus 71 CSOH, Part III tax is exigible and payable by the corporation in the amount of 50% in the excess.
We will like to point out that if the dividend was paid on the winding-up of the company (see IT-126R for the definition of winding-up) pursuant to subsection 88(2), it is our policy as outlined in Interpretation Bulletin IT-149R, paragraph 3, that we should revise the elected amounts to reflect the balance in the capital dividend account and any remaining balance that is deemed to be received pursuant to subsection 84(2) should be included in the individuals' returns as a taxable dividend.
In conclusion, since the dividend excess comes from an appraisal difference of the FMV for V-Day and since the Act covers this type of situation by the application of Part III tax, we do not recommend that subsection 247(1) be considered.
We trust our comments will be of assistance to you.
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