15 May 1991 Ministerial Letter 910898 F - General Anti-Avoidance Provisions

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.

Dear Sirs:

We are writing in response to your letter dated March 28, 1991 wherein you requested our views on the application of subsection 245(2) of the Income Tax Act (Canada) (the "Act") to the following hypothetical situation.

Facts

1.     Mr. A owns 9% of the shares of Opco which are capital property, have a fair market value of $900, and an adjusted cost base and paid-up capital of $9.  Adjusted cost base and paid-up capital have the meanings assigned by paragraphs 54(a) end 89(1)(c) of the Act, respectively.

2.     Mr. A is prepared to sell and an arm's length purchaser is willing to acquire Mr. A's 9% interest in 0pco.

3.     Mr. A has used, or is unable to utilize, his capital gains exemption to reduce the tax on the sale of his 0pco shares.  Therefore, the taxes payable by Mr. A on a sale of the Opco shares would be, approximately, $334 (50% x 75% x (900-9)).

4.     As an alternative, Mr. A could transfer the shares of Opco to Newco, a company which Mr. A incorporates, on a tax-deferred basis pursuant to the provisions of section 85 of the Act.  Opco would then redeem the shares held by Newco for $900.

5.     Since Newco owns less than 10% of the shares of Opco, the redemption of the shares by Opco would result in tax being exigible, pursuant to Part IV of the Act, on the taxable deemed dividend resulting pursuant to subsection 84(3) of the Act. The resulting tax liability of Aco would be, approximately, $223 (25% x (900-9)).

You are of the view that, by virtue of the application of subsection 245(4) of the Act, the provisions of subsection 245(2) of the Act would not apply to the series of transactions.  Since the provisions of section 85 of the Act allow taxpayers to have income taxed at the corporate level rather than at the personal level then the transfer of property to a corporation would not constitute a misuse of the provisions of the Act nor an abuse having regard to the provisions of the Act read as a whole. Similarly, there would not be a misuse of the provisions of the Act nor an abuse having regard to the provisions of the Act read as a whole where a taxpayer has a choice between alternate courses of action whereby one course of action results in a capital gain and another course of action results in a dividend and the taxpayer chooses the course of action which results in the least amount of taxes currently being payable.  Since the series of transactions does not result in any misuse of the provisions of the Act nor any abuse having regard to the provisions of the Act read as a whole then the provisions of subsection 245(4) of the Act would exempt the series of transactions from the application of subsection 245(2) of the Act.

You are also of the view that the deemed dividend would be exempt from the provisions of subsection 55(2) of the Act by virtue of the fact that the deemed dividend will be subject to tax under Part IV of the Act.

Our Comments

We agree with your interpretation that subsection 55(2) would not apply to a deemed dividend to the extent that such dividend is subject to tax under Part IV of the Act.  We refer you to Step 9 of the "decision chart" presented on page 82 of the Report of Proceedings of the Thirty-third Tax Conference and question 29 addressed on page 109 of the same Report which confirm that the Department will not apply subsection 55(2) of the Act to dividends which have been subjected to tax under Part IV of the Act.

Although it is a question of fact whether the provisions of subsection 245(2) of the Act would apply to a specific transaction or series of transactions, it is our general view that subsection 245(2) will not apply to a transaction or series of transactions which is subject to the scrutiny of a specific anti-avoidance provision, such as subsection 55(2), unless such transaction or series of transactions has been structured to circumvent the provisions of the specific provision.

Should the situation set out in your letter involve actual taxpayers and proposed transactions you may wish to submit all relevant facts and proposed transactions for a binding advance income tax ruling.

Should this situation involve actual taxpayers and completed transactions you may wish to submit all relevant facts and documentation to the appropriate District Office for their comments.

We would further caution that the above comments reflect an expression of opinion only, and as such, are not binding upon the Department.

Yours truly,

for DirectorReorganizations and Non-Resident DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch