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: XXX
This is in reply to your letter of October 1, 1981 in which you were concerned about the calculating of post 1971 income as it relates to subsection 55(2) of the Income Tax Act (the Act).
You presented us with the following hypothetical situation:
1. Corporation A is a Canadian controlled private corporation that was incorporated prior to 1972.
2. Corporation A has an October 31 year end.
3. Corporation A was acquired by Mr. X and Mr. Y in 1973 from an arm's length party for $32,000.
4. Mr. X and Mr. Y deal with each other on an arm's length basis.
5. In June 1978 Corporation A purchased Mr. X's shares in Corporation A for $55,000, which left Mr. Y as a sole shareholder.
6. At the time of the purchase, Mr. X's share of the post 1971 income (i.e., taxed retained earnings of the period from 1973 to June 1978 on hand at the time of purchase) was $34,000.
For the purposes of calculating post 1971 income as of September 1, 1981, you propose the following:
Post 1971
Income Mr. X Mr. Y A.
Income 1973 to June 1978 $34,000 $34,000
Deemed dividend June 1978 (55,000) -
(21,000) 34,000
Income July 1978 to
September 1, 1981 - 36,000
Post 1971
Income as to September 1, 1981 - $70,000
B. Calculation will commence with the purchase by Mr. X and Mr. Y of Corporation A. Mr. X and Mr. Y will be allocated their pro rata portion of the income for the period from 1973 to June 1978.
C. Mr. Y will be allocated the entire post 1971 income for the period from June 1978 to September 1, 1981.
D. The deemed dividend account of $55,000 on June 1978 will be allocated 100% to Mr. X's post 1971 income.
Generally speaking we would not agree with such a calculation of post 1971 income on hand with respect to Mr. Y's share in Corporation A for the purpose of subsection 55(2) of the Act at September 1, 1981. For the purposes of subsection 55(2) of the Act, the deemed dividend of $55,000 to Mr. X in June 1978 reduced the post-1971 income of Corporation A with respect to both Mr. X's and Mr. Y's shares in Corporation A. Thus, only a balance of $13,000 in post 1971 income ($68,000-$55,000) was available to Mr. Y after the deemed dividend to Mr. X in June 1978 and only a balance of $49,000 ($13,000 & $36,000) was available to Mr. Y at September 1, 1981. (Note: In a simultaneous redemption of Mr. X and Mr. Y both would receive full advantage of post 1971 income as it relates to their shares in Corporation A).
If you have a specific case in mind where this results in an obvious inequity and there is no evidence of a scheme of tax avoidance, you may wish to consider requesting on advance income tax ruling.
We trust that this information will be of assistance to you.
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© Her Majesty the Queen in Right of Canada, 1981
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© Sa Majesté la Reine du Chef du Canada, 1981
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