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.
Canadian Tax Foundation - B.C. Conference - September 1991
Question 48 - Dividends and Section 160
Question
Under subparagraph 160(1)(e)(i) of the Act, a non-arm's length transferee of property may be liable jointly with the transferor and is limited to the amount by which the value of the transferred property exceeds the value of any consideration given for the property. Please comment on the application of this rule in the context of the declaration and payment of a dividend does not deal at arm's length at a time when the company is liable for tax. Receipt of a declared and previously unpaid dividend extinguishes the company's debt to the shareholder which is created when the dividend is declared. Does Revenue Canada agree that for the purposes of subparagraph 160(1)(e)(i) of the Act
- (a) the declaration of the dividend does not constitute a transfer of property, and
- (b) the extinguishment of the corporate debt on payment of the dividend constitutes valuable consideration given for the dividend?
In Fournier [[1991] 1 C.T.C. 2699] 91 DTC 746 the published reasons do not focus on this particular limitation.
Answer
Subparagraph 160(e)(i) of the Act provides that in the case of any transfer (in this case the payment of the dividend), the transferor and the transferee are jointly and severally liable for the income tax liability of the transferor at the date of the transfer or for the portion thereof equal to the difference between the value of the property transferred and the consideration paid thereof, whichever is less. The purpose of this paragraph to prevent a person with substantial income tax liability from defeating the claims made on him by transferring his property to any non-arm's length party at less than fair market value consideration.
In certain fact situations the declaration of the dividend may constitute a transfer of property, and in other fact situations the payment of the dividend could, in our view, constitute a transfer of property. Property is defined in subsection 248(1) of the Act to include...(a) a right of any kind whatever...and (b) unless a contrary intention is evident, money. In declaring and later paying the dividend, the non-arm's length shareholder has much latitude to declare and pay whatever dividend he chooses to the extent that he may render the corporation incapable of satisfying it's corporate income tax liability. In a similar fact situation, it is our opinion that section 160 of the Act should apply.
Canadian Tax Foundation - B.C. Conference - September 1991 - Claude Tremblay - Section 23
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