26 June 1990 Ministerial Letter 900688 F - Purification of a Corporation

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.

Attention: 19(1)

June 26, 1990

Dear Sirs:

Re:   Request for an opinion on the potential "purification" of a corporation

This is in reply to your letter dated May 4, 1990 in which you requested our interpretation as to the application of various provisions of the Income Tax Act (the "Act") to the following situation you described.

24(1)

24(1)

It appears that the interpretation you seek relates to a specific taxpayer and, therefore, we bring to your attention Information Circular 70-6R dated December 18, 1978 issued by Revenue Canada, Taxation and the related Special Release thereto.  Confirmation with respect to proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling.  If you wish to obtain an advance income tax ruling for a particular taxpayer with respect to specific transactions which are contemplated, a written request for an advance income tax ruling can be submitted in accordance with the Information Circular.  Nevertheless, we can offer the following general comments.

You have stated that the purpose of the transactions outlined above is  24(1) in this regard, we would like to point out that

(i)     subsection 248(10) of the Act contains an extended definition of the term "series of transactions or events", and

(ii)     it is our view that a preliminary transaction will form part of a series of transactions referred to in subsection 248(10) of the Act if, at the time the preliminary transaction is carried out, the taxpayer has the intention to implement the subsequent transactions constituting the series and the subsequent transactions will be part of a series even though at the time of the completion of the preliminary transaction the taxpayer either had not determined all of the important elements of the subsequent transactions including, possibly, the identity of other taxpayers involved, or had lacked the ability to implement the subsequent transactions.

     24(1)

In addition, you have requested our views in the circumstances where 24(1) is owned by more than one shareholder and they are not related. In your view, the exception in paragraph 55(3)(a) should apply in this situation if the shareholders are acting in concert since a group of private company shareholders acting in concert do not deal at arm's length with each other or the companies involved for purposes of analyzing the related series of transactions.

It is a question of fact whether all of the shareholders would be acting in concert to control the two corporations and on this we make no comment.

The exception in paragraph 55(3)(a) does not apply where the dividend is received as part of a transaction or event or as part of a series of transactions or events that resulted in one of the situations described in subparagraphs 55(3)(a)(i) or (ii).  In our view, this means that one must look at the result after the completion of the series of transactions or events. Accordingly, your argument would only be valid if the group of shareholders continues to act in concert following the series of transactions or events.  Again, we should mention that "series of transactions or events" has the extended meaning set out in subsection 248(10) of the Act.

In our view the provisions of subsection 55(4) would also need to be, considered.  where it may reasonably be considered that the principal purpose for the group of shareholders acting in concert was to cause the parties to not deal at arm's length with each other-so that subsection 55(2) would not apply to the dividends received by   24(1) then subsection 55(4) would apply to deem the parties to deal at arm's length.

Our comments herein are provided in accordance with the practice referred to in paragraph 24 of Information Circular 70-6R.

Yours truly,

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