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.
Attention: XXX.
Dear Sirs:
RE: Subsection 247(1) of the Income Tax Act (the "Act")
In your letter of April 11, 1986 you requested our opinion on the application of subsection 247(1) of the Act to a hypothetical situation. We regret the delay in replying.
Your example involved an Opco with two 50% shareholders who were husband and wife. The husband transfers his shares of the Opco to a Holdco pursuant to subsection 85(1) of the Act, presumably for consideration that includes at least one share of Holdco. Opco then pays dividends to its shareholders, being Holdco and the wife. You asked whether in our opinion subsection 247(1) of the Act would apply to the dividends received by Holdco from Opco.
Our Comments
Assuming that the husband holds his Opco shares as capital property, and assuming that he does not deal at arm's length with Holdco, the transactions described would be subject to the provisions of subsection 84.1(1) of the Act. The effect of the application of subsection 84.1(1) will depend on the paid-up capital, within the meaning of paragraph 89(1)(c) of the Act ("PUC"), of the transferred Opco shares and the Holdco shares issued as consideration, and on the value of any non-share consideration received by the husband from Holdco for his Opco shares. Subject to these facts, application of subsection 84.1(1) may or may not result in a reduction of the PUC of the Holdco shares, or the deemed receipt of a dividend by the husband upon the disposition of the Opco shares.
As the transactions would be subject to the provisions of subsection 84.1(1) of the Act, it is our opinion that subsection 247(1) would not be applied to the subsequent dividend on the Opco shares. This opinion is based on the assumption that there are no significant undisclosed facts or transactions relevant to your example.
The opinion with respect to the application of subsection 247(1) stated in the previous paragraph is not a ruling and is therefore not binding on Revenue Canada, Taxation, as explained in paragraph 24 of Information Circular 70-6R, published on December 18, 1978.
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© Her Majesty the Queen in Right of Canada, 1986
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© Sa Majesté la Reine du Chef du Canada, 1986
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