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.
Re: Parts IV.I and VI.I Tax
In the context of qualifying butterfly reorganizations the deemed dividends that will arise are subject to Parts VI.I and IV.I of the Acts unless they are "excluded dividends" and "excepted dividends".
Subsections 191(2) and 191(4) provide exceptions from the imposition of Parts VI.I and IV.I taxes. One of the definitions of excluded dividends under subsection 191(1)(a) is that the shareholder receiving the dividend has "substantial interest" in the payor.
Substantial interest is defined in subsection 191(2) as follows:
1) Shareholder is related to payor corporation
or
2) Shareholder owns shares representing
a) 25% of votes, and
b) 25% of value of all shares,
and either
c) 25% of value of shares, other than shares that would be taxable preferred shares,
or
d) 25% of value of each class of shares
There is difficulty in satisfying condition 2 above, in a reorganization where the shareholders in a particular corporation (Parcorp) are unrelated.
In a butterfly where the transferee corporation ("Newco") issues voting preferred shares to Parcorp in consideration for the property transferred from Parcorp to Newco, the preferred shares may meet the requirements in 2(a) and (b) above, but will generally not be able to meet either (c) and (d), as the preferred shares will be taxable preferred shares.
Consequently, in cases where there are unrelated shareholders who do not control the particular corporation the exception in subsection 191(4) of the Act will have to be satisfied in order to avoid the payment of Part VI.I and Part IV.I tax. The exception provided for in subsection 191(4) will require that the terms and conditions of the share or the agreement in respect of the share to specify an amount for which the share is to be redeemed, acquired or cancelled. To satisfy this requirement the amount to be specified must be a dollar amount.
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© Sa Majesté la Reine du Chef du Canada, 1991
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