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: Requirements under 215 where amount of paid-up capital cannot be accurately computed by a minority shareholder.
Position: Must comply with Act.
Reasons: The law.
XXXXXXXXXX 2000-002734
Attention: XXXXXXXXXX
July 4, 2000
Dear Sirs:
Re: Section 212.1 - Non-Arm's Length Sale of Shares by Non-Residents
This is in reply to your facsimile letter of May 19, 2000, wherein you requested our views under the Income Tax Act (the "Act") in the following situation.
In your letter you indicate that a person who is not a resident of Canada ("NRP") owns 15% of the shares of a corporation that is resident in Canada ("Canco"). These shares of Canco also represent more than 10% of the votes and value of all of Canco's outstanding shares. NRP transfers all his Canco shares to a corporation owned solely by him that is resident in Canada ("Holdco"). As consideration for the Canco shares transferred to Holdco NRP receives non-share consideration from Holdco equal to the fair market value of the Canco shares so transferred. Since Holdco is connected with Canco immediately after the transfer, Holdco will be deemed to have paid and NRP will be deemed to have received a dividend from Holdco pursuant to paragraph 212.1(1)(a) to the extent the fair market value of the non-share consideration paid by Holdco exceeds the paid-up capital of the shares of Canco.
You advise that the publicly available information does not allow for a proper computation of the paid-up capital of the Canco shares. You also advise that since NRP does not have access to the accounting and financial records of Canco and since NRP is not able to compel Canco to provide such information the amount of paid-up capital that relates to the class of shares of Canco owned by NRP cannot be accurately determined. You ask whether Canco is required to provide such information to NRP under the Act and, if not, how NRP and Holdco should determine the amount of the deemed dividend under paragraph 212.1(1)(a).
Your request appears to relate to a completed transaction. Confirmation of the income tax consequences of completed transactions involving specific taxpayers will only be provided where the request is made to the taxpayer's local Canada Customs and Revenue Agency's ("CCRA") Tax Services Office. Although we are not able to comment specifically on the situation described in your letter we can offer the following general comments which we caution may or may not be applicable to your fact situation.
Where paragraph 212.1(1)(a) applies to deem a dividend to have been paid by a "purchaser corporation" and received by a non-resident person subsection 212(2) will require the non-resident person to pay tax under Part XIII of the Act to the extent that such dividend is considered to be a "taxable dividend" or a "capital dividend" as those terms are defined in subsection 89(1). Subsection 215(1) also requires the payor of the dividend (i.e., the purchaser corporation) to, inter alia, deduct or withhold the proper amount of tax under Part XIII and remit such amount to the Receiver General in respect of the particular non-resident dividend recipient. Moreover, to the extent that any person fails to deduct and remit the Part XIII tax required a penalty equal to 10% of the amount that should have been deducted and remitted pursuant to subsection 227(8) will be applied unless the failure was made knowingly or under circumstances amounting to gross negligence in which case the penalty is 20% (see Information Circular IC 77-16R4 paragraphs 48 and 69).
Since the definition of "paid-up capital" in subsection 89(1) after March 31, 1977 requires such amount to be computed "...without reference to the provisions of this Act...", subject to certain listed exceptions, the computation of paid-up capital essentially involves a matter of corporate law, rather than tax law (see paragraphs 2 and 3 of Interpretation Bulletin IT-463R2). In your letter you indicate that NRP is unable to compel Canco to provide accounting and financial information to allow for the proper computation of paid-up capital that relates to the Canco shares. We understand that under some corporate acts (for example, the Canada Business Corporations Act) a shareholder has the right to examine certain share records of the corporation. Assuming that under the relevant corporate law governing Canco NRP does not have such rights, or such rights when exercised, do not provide NRP with information sufficient to make such a computation we are aware of no provision in the Act that would require Canco to provide NRP with such information (i.e., Canco is not a payor of the dividend such that it does not have a joint or several liability to withhold and remit tax under Part XIII).
Notwithstanding the above, there is an onus on NRP and Holdco to formally request this information from Canco. In the event that Canco is not willing to co-operate, we would expect that since Canco is a public company, NRP would at a minimum have access to the audited financial statements of Canco such that at the very least an estimate of the paid-up capital of the shares of Canco, and NRP's and Holdco's potential exposure to Part XIII tax, could be made. We would expect that NRP and Holdco would use such information to ensure that their respective requirements under Part XIII of the Act are respected and if there are any deficiencies in this regard the CCRA should be so notified. To the extent that the amount of any deemed dividend (and amount of withholding tax in respect thereof) was under reported the general penalty provisions of the Act would ordinarily apply if NRP and Holdco have not taken reasonable steps to obtain the information necessary to accurately determine their potential tax liability.
Our comments are provided in accordance with the practice described in paragraph 22 of IC-70-6R3.
Yours truly,
for Director
Reorganizations and International Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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