3 November 1981 Income Tax Severed Letter RRRR47 - Whether inter-foreign affiliate stock dividend constitutes foreign accrual property income

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:

This is in reply to your letter dated August 17, 1981 wherein you requested our opinion on bother or no an inter-foreign affiliate stock dividend would constitute foreign accrual property income (FAPI) in the following hypothetical situation:

• 1. Mr. A is a resident of Canada for the purposes of the Income Tax Act (Canada) (the "Act").
• 2. Mr. A owns all the shares of corporation A ("CFA1"), which in turn owns all the shares of corporation B ("CFA1").
• 3. CFA1 and CFA2 are not resident in Canada for the purposes of the Act.
• 4. CFA2 pays a stock dividend to CFA1 by issuing shares of CFA2 to CFA1.

The results, as we see them, are as follows:

• (i) Since the Canadian taxpayer is an individual, the stock dividend will not be deemed to be nil pursuant to subsection 95(7) of the Act as that provision applies only to a corporation resident in Canada.
• (ii) Dividends paid by one foreign affiliate of a taxpayer to another are income from property but are excluded from fapi pursuant to the definition in clause 95(1)(b)(i)(B) of the Act. However, a stock dividend paid after 1976 by a corporation not resident in Canada is specifically excluded from the definition of a dividend under paragraph 248(1)(c) of the Act. Consequently, the stock dividend paid by CFA2 to CFA1 would, in our opinion, be included in CFA1's income from property pursuant to subparagraph 95(1)(b)(i) of the Act since there is no specific provision to exclude it.

Comments:

Because corporations resident in Canada would not be taxed on such inter affiliate stop dividends for the reasons outlined above, we are uncertain as to whether or not the different result for a Canadian resident individual was intended. To us the result appears to be anomolous, and accordingly, we are referring the matter to our Provincial and International Relations Division for their consideration of receding a possible amendment to the Act to the Department of Finance.