7 March 1994 External T.I. 9238515 F - Disproportionate Allocation Of Paid Up Capital

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.

XXXXXXXXXX     5-923851

Attention:  XXXXXXXXXX

March 7, 1994

Dear Sirs:

Re:  Allocation of paid-up capital among classes of shares

This is in reply to your letter of December 23, 1992 wherein you requested our views on the possible application of subsection 84(1) or 84(3) of the Income Tax Act (the "Act") to the allocation of paid-up capital ("PUC") to different classes of shares issued by a corporation.  You also asked whether such allocation would result in any immediate adverse tax consequences.

The shares issued by the corporation result from a transfer to the corporation, to which subsection 85(1) of the Act applies, of shares held by a shareholder in that same corporation in consideration for shares only of the corporation.  You indicated that the agreed amount under subsection 85(1) is equal to the fair market value of the shares transferred and is greater than their adjusted cost base and their PUC.  You also indicated that the aggregate PUC of the shares issued by the corporation in consideration for the transfer is equal to the PUC of the shares transferred by the shareholder.

In our opinion, the allocation of PUC in any proportion to the different classes of shares issued in the circumstances described above, to the extent allowed by corporate law, would not result in any deemed dividend by virtue of subsections 84(1) or 84(3) of the Act.  It is not possible to determine, from the facts provided, whether the issue of shares would be considered to result in an abuse for the purposes of subsection 245(4) of the Act.  A determination under subsection 245(4) will always depend on particular circumstances and could only be made after a thorough review of all the facts surrounding a proposed transaction.

The foregoing comments are given in accordance with the practice referred to in paragraph 21 of Information Circular 70-6R2 and are not binding on Revenue Canada, Taxation.

Yours truly,

for DirectorReorganizations and Foreign Division Rulings DirectorateLegislative and IntergovernmentalAffairs Branch