1 September 1994 External T.I. 9416665 - APPLICATION OF 56(2) TO "WAIVED DIVIDENDS" (6554-1)

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Application of subsection 56(2) of the Act to a waived dividend.

Position TAKEN:

S. s. 56(2) would not generally apply in an arm's length situation.

Reasons FOR POSITION TAKEN:

See roundtable questions below.

							941666
XXXXXXXXXX							Jim Wilson

Attention: XXXXXXXXXX

September 1, 1994

Dear Sirs:

Re: Waived Dividends

We are writing in response to your letter dated June 20, 1994 wherein you requested a technical interpretation as to the application of subsection 56(2) of the Income Tax Act (the "Act") to a waived dividend.

The situation described in your letter involves an actual proposed transaction. Assurance as to the tax consequences of actual proposed transactions will only be given in the context of an advance income tax ruling. The procedures for requesting an advance income tax ruling are outlined in Information Circular 70-6R2 dated September 28, 1990 issued by Revenue Canada, Taxation. However, we can offer the following general comments which we hope will be of assistance to you.

This topic has previously been addressed in question 22 of the 1992, question 41 of the 1986, question 24 of the 1984, and question 26 of the 1981 Revenue Canada Round Tables. As indicated in our responses to the Round Table questions referred to, subsection 56(2) of the Act will ordinarily be applicable if the waiver of dividends in a closely held corporation is undertaken for the purpose of transferring income to other shareholders. The provisions of subsection 56(2) of the Act will not generally be applied where the shareholders of a corporation deal at arm's length. However, the final determination of the application of subsection 56(2) or any other provision of the Act will depend on the facts in each case.

The foregoing comments represent our general views with respect to the subject matter of your letter. As indicated in paragraph 21 of the aforementioned Information Circular this is not an advance income tax ruling and is therefore not binding on Revenue Canada, Taxation.

Yours truly,

for Director
Reorganizations and Foreign Division
Rulings Directorate
Policy and Legislation Branch