21 January 1985 Income Tax Severed Letter

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.

FOREIGN & SMALL BUSINESS SECTION D. Lanos (613) 957-2125 Ref: 7-4095

XXXX

This is in reply to David Burton's Round-Trip Memorandum of July 16, 1985 (copy attached) concerning a Vancouver D.O. memorandum (Gordon Paulson) dated January 21, 1985 in respect of representation by XXXXXXXX

Mr. Burton has since requested that his reference to XXXX 1954 Internal Revenue Code (the "Code") and subsection 88(3) of the Income Tax Act (the "Act") be ignored as the real point of concern is whether the "consent dividend" included XXXX

Prior to your enquiry, our position was that it could, but as agreed in our meeting (D. Lanos, D. Burton) of July 23, 1985 with XXXX that position has now been reviewed in light of XXXX contentions that a deemed dividend for U.S. tax purposes (the consent dividend) is not "received" for purposes of the Canadian Act and that, in any event, the Canadian taxation system is not harmed by not treating such dividends as received for purposes of the Act.

The facts as we understand them from the representations made by XXXX in her letter of January 7, 1985 to Vancouver D.O. and our subsequent meeting, as well as from additional research, are as follows:

1. XXXX

2. XXXX

3. For U.S. income tax purposes, a consent dividend is considered to be a distribution to a shareholder and a simultaneous contribution of capital back to the dividend-paying company by the shareholder-recipient (see section 565(c) of the Code)

4. XXXX

5. Section 565(e) of the Code requires foreign corporations to remit with their consent dividend election the amount that would be required to be deducted and withheld if the consent dividend had been paid to the shareholder in money as a dividend.

XXXX

6. XXXX argues, and we agree, that the provisions of a foreign statute, such as the Code, are not relevant to a determination of whether an amount has been received in respect of a dividend for purposes of section 90 of the Act. She makes reference to two court cases (Robwaral Limited v. M.N.R., 1960 C.T.C. 16, Ex. Ct. and Albert Pichosky v. M.N.R., 64 C.T.C. Ex. Ct.), both in our view having little relevance to our consent dividend situation, but she cannot find any cases directly on point. We could not uncover any relevant cases either.

7. XXXX that the financial statements of a U.S. company prepared in accordance with generally accepted accounting principles would not record a consent dividend as a dividend paid or received by the respective payor and payee because a consent dividend is not considered to be income distributed or received. She adds that the XXXX

8. XXXX

Previous Position on Consent Dividends

9. XXXX

10. XXXX

Review of Previous Position

11. XXXX

U.S. Internal Revenue Service

12. XXXX

13. XXXX

Revised Position on Consent Dividends

14. The following is a summary of our current position as it applies to

A. XXXX

B. XXXX

C. XXXX

D. XXXX

Other Factors Considered

15. XXXX

16. XXXX

17. XXXX

18. XXXX

19. XXXX

Conculsion

We hope the above will assist you in your reply to XXXX concerns regarding section 90 of the Act as well as in any related issues raised by the District Office in relation to consent dividends.

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