4 April 2011 External T.I. 2011-0394191E5 - Section 55(2) dividend

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.

Principal Issues: Whether section 55(2) applies in situation where the dividend is paid prior to disposition of shares

Position: General comments provided

Reasons: Question of fact.

XXXXXXXXXX
									2011-039419
									Jelena Pajkovic
									(613) 941-0782

April 4, 2011

Dear XXXXXXXXXX :

Re: 55(2) dividend

This is in response to your letter dated December 17, 2010, wherein you requested our comments regarding whether subsection 55(2) of the Income Tax Act (hereinafter "ITA") would apply in the hypothetical scenario described below.

In your letter, you briefly described the facts of a situation as follows:

a) Corporation A is a Canadian - controlled private corporation (hereinafter "CCPC").

b) In your opinion, all assets of Corporation A are used in an active business.

c) X is an individual resident in Canada who owns 85% of the voting shares (100% of Class A shares) of the capital stock of Corporation A.

d) Y is an individual resident in Canada who owns 15% of the voting shares (100% of Class B shares) of the capital stock of Corporation A.

e) X and Y are not related.

f) Y incorporates Corporation B and transfers his part of the voting shares of the capital stock of Corporation A to Corporation B under subsection 85(1) of the ITA.

g) Corporation A pays a dividend in the amount of $400,000 to Corporation B to which a section 112 deduction applies.

h) Corporation B purchases all of the Class A shares of the capital stock of Corporation A owned by X at fair market value (hereinafter "FMV"). This results in Corporation A being wholly-owned by Corporation B. Corporation B uses the amount of $400,000 to fund the purchase price of the Class A shares acquired.

i) You consider that X realizes a capital gain on the sale of his part of the voting shares of the capital stock of Corporation A which qualifies for a capital gains deduction.

The intent of Y is to own through his wholly-owned holding company all the shares of the capital stock of Corporation A.

In your opinion, subsection 55(2) of the ITA does not apply in this situation as the intent of the dividend payment is not to decrease the value in Corporation A for capital gains purposes.

Our Comments:

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request. For more information concerning advance income tax rulings, please refer to Information Circular 70-6R5 dated May 17, 2002. Where the particular transactions are completed, the enquiry should be addressed to the relevant Tax Services Office.

The potential application of subsection 55(2) of the ITA requires an analysis of all the facts and circumstances of a particular given situation. Given the wording of this question only provides a brief description of a given hypothetical situation, it appears impossible to definitely express our opinion on the potential application of this subsection or other sections of the ITA. We can, however, make the following general comments.

It is possible that subsection 55(2) of the ITA would likely not apply in the hypothetical situation described above by reason of the application of paragraph 55(3)(a) of the ITA which provides that subsection 55(2) of the ITA does not apply to any dividend received by a corporation if, as part of a transaction or event or series of transactions or events as a part of which a dividend was received, there was no disposition or increase in interest described in paragraph 55(3)(a) of the ITA.

Moreover, in general, it is the Agency's position that section 84.1 of the ITA would not apply to a situation known as a ''leveraged buyout". An example of a leveraged buyout transaction is described in paragraph four in Supplement 1 of Information Circular IC 88-2.

However, depending on the circumstances, section 84.1 or subsection 245(2) of the ITA may be applicable in a situation involving a dividend stripping arrangement. In this regard, we are unable to make such a determination in the particular situation described above.

We trust the above comments will be of assistance.

Yours truly,

Maurice Bisson, CGA
for Director
Corporate Reorganizations and
Resources Industry Section
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch