7 April 1995 External T.I. 9502925 - CAPITAL GAINS EXEMPTION

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:

Whether subsection 110.6(8) would apply to deny the capital gains deduction on the disposition of shares, the accrued capital gain ($900,000) of which is partly ($40,000) attributable to the non-payment of dividends on non-prescribed shares.

Position TAKEN:

Question of fact.

Reasons FOR POSITION TAKEN:

The question of whether there is an abuse, in the sense that the transaction constitutes an attempt to convert dividend income into exempt capital gains, is a question of fact.

			5-950292
XXXXXXXXXX		C. Chouinard

Attention: XXXXXXXXXX

April 7, 1995

Dear Sir:

Re: Capital Gains Exemption - Subsection 110.6(8) of the Income Tax Act

We are writing in response to your letter of January 23, 1995, wherein you requested our comments on the application of the above-mentioned provision of the Income Tax Act (the "Act") with respect to the accrued capital gain on common shares.

In the situation you describe, a small amount of dividends was paid in respect of preferred shares in the year they were issued, however, no further dividends were paid on these shares in the following years. The preferred shares have since been redeemed. Assuming an average annual rate of return of 8% per year, you estimate that approximately $40,000 of the $900,000 accrued capital gain on the common shares is attributable to the fact that dividends were not paid on the preferred shares. You inquire whether $40,000 represents a "significant part" of the $900,000 capital gain accrued on the common shares for purposes of subsection 110.6(8) of the Act.

Our Comments

The facts outlined in your letter appear to relate to actual proposed transactions involving particular taxpayers and therefore a binding determination from Revenue Canada regarding the applicability or inapplicability of subsection 110.6(8) can only be obtained by way of an advance tax ruling request following the procedures outlined in Information Circular 70-6R2. We are, however, prepared to offer the following general comments.

Subsection 110.6(8) of the Act will apply to deny a capital gains exemption deduction if it may reasonably be concluded, having regard to all the circumstances, that a significant part of a capital gain is attributable to the fact that dividends were not paid on a share (other than a prescribed share) of a corporation or, if paid, were less than a required amount.

In interpreting the phrase "a significant part of the capital gain", it is our view that the determination of what constitutes a significant part of the capital gain is a question of fact which must be decided in each particular case having regard, as the subsection states, to all the circumstances. Accordingly, the Department has not developed detailed or specific guidelines in respect of this issue. While we are of the view that in many cases this question is appropriately answered by ascertaining the proportion or percentage of the capital gain that is attributable to the non-payment of adequate dividends, we are also of the view that there may be circumstances where it is appropriate to consider the amount or magnitude, expressed in dollars, of the capital gain that is so attributable.

We trust that these comments will be of assistance.

Yours truly,

R. Albert
for Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch