26 May 1988 Income Tax Severed Letter RCT 7-2892 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.

Subject: Section 183.1 of the Income Tax Act (the "Act")

This is in reply to your request for answers to the four questions which Mr. Finch left with M.A. Hiltz of our office in their telephone conversation of May 18, 1988. Your questions, as we understand them, and our comments are set out below. Please note that we understand that Finance is considering amendments to section 183.1 to respond to many concerns raised by Revenue XXX

Question 1

Would section 183.1 apply where a father sells shares of an Opco to a Holdco, as part of an estate freeze, and Opco subsequently purchases the sold Opco shares for cancellation?

Our Comments

Due to the limited facts provided in the question we can only make general comments.

Subsection 183.1(6) provides that, to the extent that section 84.1 applies to the father's transfer of the Opco shares to Holdco, subsection 183.1(1) will not apply. The question does not contain enough information to ascertain the extent, if any, to which section 84.1 would apply to the transfer, so we are unable to comment on whether any exemption is available pursuant to subsection 183.1(6) of the Act.

If section 84.1 does not apply to the transfer, and if the exceptions in subsection 183.1(4) do not apply, there are circumstances under which the currently enacted version of section 183.1 could apply to the transactions. Where the consideration received by the father for the Opco shares exceeded the paid-up capital of those shares, and where that consideration is to be provided directly or indirectly in any manner whatever by Opco, paragraph 183.1(2)(b) will deem a distribution of Opco's corporate surplus to have taken place. Paragraph 183.1(1)(c) would then provide that Part II.1 tax would be exigible if one of the main purposes of the series of transactions was to enable the father to realize a direct or indirect distribution of Opco's surplus. An examination of the facts of particular cases would be necessary to ascertain whether this purpose test was satisfied.

We do not believe such a possible application is consistent with the intent of the legislation, and we have brought this matter to the attention of Finance.

Question 2

What does the reference to "... one of the main purposes ..." in paragraph 183.1(1)(c) mean?

Our Comments

XXX on subsection 247(2) which has considered the meaning of the reference to "... one of the main reasons ..." in paragraph 247(2)(b) of the Act.

Under subsection 247(2) corporations are deemed to be associated if it can be shown that the separate existence of the corporations is not solely for the purpose of carrying out their business in the most effective manner and that one of the main reasons for the separate existence of the corporations is to reduce taxes payable. The courts have held that a determination of a main purpose is an objective conclusion of fact which refers to the state of mind and the intention of the taxpayer. In the absence of an admission by the taxpayer, the finding of a main purpose must be based on inferences drawn from the material facts. The courts state that such a purpose will normally be present where the actual saving of tax was not a mere side effect but was one of the main goals of the taxpayer.

Question 3

What is the meaning of the words "... in order to increase the degree of control ..." as used in paragraph 183.1(4)(b)?

Our Comments

We have not completed a review of any applications for advance rulings in which this phrase was an issue, so we have not formulated any interpretive guidelines.

Question 4

What circumstances or transactions would "... increase the degree of control ..." of a corporation by shareholders for purposes of paragraph 183.1(1)(b)?

Our Comments

Our comments here are the same as for question 3 above.