28 March 1996 External T.I. 9608455 - ORDINARY COURSE OF BUSINESS

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:

Are share acquired in "ordinary course of Business"

Position:

Guidelines - case by case

Reasons:

Factual determination

		960845
XXXXXXXXXX	C. Tremblay

Attention:XXXXXXXXXX

March 28, 1996

Dear Sirs:

Re: Subsections 84(4.2), 258(3) and 258(4) of the Income Tax Act (the "Act")

This is in reply to your letter of March 3, 1996, requesting our views on the relationship among subsections 84(4.2), 258(3) and 258(4) of the Act.

We confirm that subsection 84(4.2) would apply to shares owned by a specified financial institution such that the amount received on the reduction of the paid-up-capital would be a dividend rather than a return of capital.

Further subsection 258(3) of the Act would then apply to the specified financial institution resident in Canada where the payer is not resident in Canada such that the dividend from the application of the provisions of subsection 84(4.2) of the Act would be considered interest income. However if the share was not acquired in the ordinary course of business, subsection 258(4) of the Act would provide an exception to the application of subsections 258(3) and 84(4.2) of the Act.

Although you have asked for guidelines on what is considered to be a share not acquired in the ordinary course of business, it appears that you have a proposed transaction in mind. It is not our practice to give written opinions concerning proposed transactions, as indicated in Information Circular 70-6R2. Should you wish to request an advance ruling on these or other transactions which may be proposed, please refer to Information Circular 70-6R2 for the procedure to be followed. We have set out, however, some general comments which may be of some assistance.

The exception from the term preferred share rules for shares not acquired in the ordinary course of business is intended to permit ordinary tax treatment for dividends (and returns of capital) on shares in, for example, genuine functional subsidiaries as opposed to shares representing security on commercial lending in the ordinary course of business. Although the term "ordinary course of business" is not specifically defined, the following factors would be considered in establishing whether particular shares were acquired in the ordinary course of business:

(a) the nature of the shareholder's activity;

(b) the number and frequency of such share acquisitions by the holder;

(c) whether the funds involved represent the initial capitalization of a new subsidiary or the provision of additional operating capital to a subsidiary, both of which would normally indicate permanent capitalization (and therefore not be in the ordinary course of business);

(d) the terms of the shares acquired and their status as "term preferred shares" otherwise than by virtue of control of the issuer by specified financial institutions; and

(e) whether the shares were acquired as consideration on the sale of a business or part of a business where the holder's business has not previously included such transactions.

Generally, shares issued on the incorporation of a wholly-owned subsidiary where the proceeds of the sale of the shares constitute permanent capital of the subsidiary would not be acquired in the ordinary course of the parent company's business. In addition, shares acquired on the sale of a business or part of a business in the course of an internal reorganization within a corporate group would not occur in the ordinary course of business.

Further, the Courts have rejected any argument to the effect that all securities acquired by certain types of corporations such as banks or life insurers have been acquired in the ordinary course of business. A factual determination must be made. Factors similar to those used in distinguishing income from capital are relevant in the determination.

We trust our comments will be of assistance to you.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch