29 January 1990 Administrative Letter 5-9196 F - Corporate Reorganization - Treatment of Dividends

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.

January 29, 1990

Dear Sirs:

Re: Paragraph 55(3)(b) of the Income Tax Act (Canada) (the "Act")

We are writing in reply to your letter of December 7, 1989 in which you requested an interpretation of the applicability of paragraph 55(3)(b) of the Act in four situations involving the transfer by a corporation of all of its assets to its shareholders, where one of the shareholders dissents from approving the distribution.

You have provided us with the following facts:

1. Opco is a taxable Canadian corporation.

2. Opco has three equal shareholders, all of whom are taxable Canadian corporations.

3. It is proposed that Opco distribute all of its property to the three shareholders. This distribution must be approved by two thirds of the shareholders (the "approving shareholders").

4. Your client will dissent from approval of the distribution.

5. Pursuant to section 149 of the Business Corporations Act of Alberta ("BCAA") your client will be entitled to require Opco to repurchase its shares for their fair value. Fair value will be determined by either Opco and your client or by the Court. As a result of this action, under the BCAA your client will cease to have any rights as a shareholder other than the right to receive the fair value of its shares. The loss of rights will occur on the earliest of the following:

(a) The date that the distribution of assets is effected;

(b) The date that Opco and your client have agreed on a fair value of the shares; or

(c) The date that the Court has made an Order fixing the fair value of the shares.

It is your concern that, since your client will receive only cash rather than its proportionate share of all types of property owned by Opco, the transfer of assets fails to comply with the requirements of paragraph 55(3)(b) of the Act. In order to qualify, for purposes of paragraph 55(3)(b) of the Act, you have considered the following actions.

Option 1

Opco could borrow money to pay out your client and the approving shareholders would accept a greater amount of debt on a subsequent butterfly. Alternatively, the approving shareholders could borrow money to invest in Opco shares. Opco,would pay out your client from these funds and the butterfly would then occur. It is your belief that either butterfly would not satisfy the conditions of paragraph 55(3)(b) of the Act because liabilities have been incurred or assets have been acquired by Opco in contemplation of the butterfly.

Option 2

The approving shareholders could proceed to transfer two-thirds of Opco's property to themselves thereby leaving your client with all the shares of Opco. It is your interpretation that, since your client loses its rights as a shareholder once the butterfly occurs, it is actually being cashed out and the butterfly does not meet the requirements of paragraph 55(3)(b) of the Act.

Option 3

The approving shareholders could purchase your client's shares and then proceed with the butterfly. We have previously indicated in a telephone conversation that this would be an acceptable course of action provided that each type of Opco's assets is transferred to the approving shareholders in proportion to their then shareholdings in Opco.

Option 4

The, butterfly would proceed but your client would sell the assets it has received on the butterfly to the approving shareholders in a taxable sale. We have previously indicated in a telephone conversation that this would be an acceptable alternative.

Comment

The situation which you set out relates to an actual contemplated transaction. Assurance as to the tax consequence of contemplated transactions can only be given in response to a request for an advance income tax ruling as described in Information Circular 70-6R, dated December 18, 1978.

Depending on the facts of the situation, your conclusions may, or may not, be appropriate.

Yours truly,

for DirectorReorganizations and Non-Resident DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch