12 November 1987 Income Tax Severed Letter RCT 5-3701 F

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.

Dear Sirs:

RE:     Proposed section 183.1 of the Income Tax Act (the "Act") as contained in former Bill C-64 (which received second reading in the House of Commons of Canada on June 30, 1987)

This is in reply to your letter of July 30, 1987 in which you requested our opinion on the application of the abovementioned proposed section of the Act to the following hypothetical situation:

-     Mr. X and Mrs. X own all the shares of a corporation ("Opco") which carries on an active business.

-     the aggregate fair market value of the shares of Opco is $460,000 while the aggregate paid-up capital of those shares is $20.00.

-     as part of an estate freeze Mr. X and Mrs. X transfer their shares of Opco to a holding company ("Holdco") receiving consideration consisting of preference shares of Holdco which are redeemable at the option of the holder for an aggregate amount of $460,000 and which have an aggregate paid-up capital of $20.00.

-     valid elections are filed pursuant to subsection 85(1) of the Act in respect to these transfers.

-     as part of the estate freeze common shares of Holdco are issued to Mr. X, Mrs. X and their adult children for nominal consideration.

You have asked that we confirm that proposed section 183.1 of the Act would not apply to the above hypothetical situation and that it would not apply even if Opco had significant amounts of liquid assets which it pays by way of dividend to Holdco who in turn pays those liquid assets to the individual shareholders of Holdco by way of dividend or deemed dividend.

We are unable to provide you with the confirmations you have requested. In our opinion if the provisions of proposed section 183.1 are reintroduced and enacted as contained in former Bill C-64 the hypothetical situation detailed above may result in tax becoming payable under that section. As you have noted, under proposed section 183.1 where the consideration for the acquisition of shares exceeds the paid-up capital of those shares immediately before the acquisition a distribution of corporate surplus is deemed to have occurred and therefore unless one of the specific exceptions contained in that section is met a tax may become payable in accordance with that section.

In our view if Mr. X, Mrs. X and Opco are all resident in Canada and the shares of Opco constitute capital property to Mr. X and Mrs. X, the provisions of proposed subsection 183.1(6) may exempt Holdco's acquisition of the Opco shares held by Mr. X and Mrs. X from the tax levied under proposed section 183.1 if the provisions of section 84.1 have applied in respect of such acquisition.

You have also indicated that in your view proposed section 183.1 of the Act is not intended to apply to estate freeze transactions. Since the responsibility for drafting these proposed amendments to the Act lies with the Department of Finance we would suggest that you address to them any questions you may have in that regard.