7 February 1991 Income Tax Severed Letter - Review of the Case Study of Corporate Reorganization Course Material

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.

Subject: Review of the Case Study of the Corporate Reorganization Course Material

We are writing in response to your request for a technical review of the Corporate Reorganization Course Material. This memorandum contains our comments on the Case Study with respect to subsection 55(2) which you recently sent us.

Our comments are as follows:
• 1. As the sale of the 100 common shares of Tool Co. Ltd. by Mr. A to T.T. Investments Ltd. occurred on June 30, 1986 and as subsequent transactions described in the Case Study all took place in 1988 and 1989, we suggest that the past tense be used throughout the Case Study.
• 2. The second paragraph of the Case Study indicates that Mr. T. has agreed to inject capital through a preferred share issuance. However, no details of an issue of preferred shares are provided. If preferred shares of Tool Co. Ltd. have actually been issued to Mr. T. or T.T. Investments Ltd., the existence of such preferred shares may affect the Answer to the Case Study.
• 3. The word “each” in item 6 on page 3 of the Case Study is probably a misprint for “cash”.
• 4. On page 1 of the Answer to the Case Study under July 1/88, we suggest that the phrase “The rules of 55(2) and 55(3)(a) have been met which ...” be changed to “Since the result of the subsection 84(3) deemed dividend is to reduce a capital gain and the exceptions found in paragraphs 55(3)(a) and (b) do not apply, the provisions of subsection 55(2) ...”. In our view, it is not correct to say that the rules of 55(2) and 55(3)(a) have been met in that if the rules in 55(3)(a) have been met, 55(2) would not apply.
• 5. On page 3 of the Answer to the Case Study and opposite to the date “June 1/89”, we feel that subparagraph 55(3)(a)(i) is also relevant because dividends were received by T.T. Management (1989) Ltd. as part of the series of transactions or events that resulted in a disposition of property (i.e. shares of Tool Co. (1988) Ltd.) to a person (i.e. Tool Co. (1988) Ltd.) with whom T.T. Management (1989) Ltd. was dealing at arm's length. Therefore, we suggest that the sentence “Since subparagraph 55(3)(a)(ii) applies in this case then 55(2) will apply” be deleted and replaced with wording similar to that suggested in (4) above.
• 6. The answer recorded under the heading “June 1, 1989” is correct on the assumption that Tool Co. (1988) Ltd. had not earned any safe income for the period from September 1, 1988 to June 1, 1989 which would be attributable to the 100 Special B shares or that no designation was filed under paragraph 55(5)(f). Also, the “redemption” of the 100 Special B shares of Tool Co. (1988) Ltd. on June 1, 1989 could be considered as part of the series of transactions or events that included the transactions which occurred on July 1, 1988. If so, then since safe income is computed immediately before the commencement of the series of transactions or events, any safe income attributable to the Special B shares would not be relevant for purposes of subsection 55(2).
• 7. We suggest that the terminology used to refer to the Class B shares of Tool Co. (1988) Ltd. be consistent, that is, either they be called “Special B shares” or “Class B shares”.

Other Observations

You may also wish to point out the following observation to the participants:

Control of Tool Co. (1988) Ltd. was acquired first on July 1, 1988 by Mr. B as a result of the redemption by Tool Co. (1988) Ltd. of its 100 common shares held by T.T. Investments Ltd., and again on June 1, 1989 by Mr. B as a result of the redemption by Tool Co. (1988) Ltd. of its 100 Special B shares held by T.T. Management (1989) Ltd.. These acquisitions of control would cause the taxation years of Tool Co. (1988) Ltd. to have ended immediately before the acquisitions of control, pursuant to subsection 249(4) of the Act.