2 April 1982 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.

APR 2 1982

J.F. Oulton (613) 995-1787

XXXX

Dear Sirs:

This is in reply to your letter of January 29, 1982 wherein you requested our consideration of your views in the following hypothetical situation:

1. A is an individual resident in Canada.

2. A's equity percentage in a non-resident Corporation (FA) is less than 10%. FA is therefore not a foreign affiliate of A, as defined in paragraph 95(1)(d) of the Income Tax Act (the Act).

3. A inherits some shares in FA as a result of the death of C, a non-resident of Canada. A and C are related.

4. As a consequence of the inheritance, A's equity Dercentage in FA exceeds 10%, so that it becomes not only a foreign affiliate but also a controlled foreign affiliate of A pursuant to sub- paragraph 95(l)(a)(iii) of the Act.

5. You have asked us to assume that the post base to A of the original shares if $50,000, all being capital to A.

6. You have asked us to assume that pursuant to paragraph 70(5)(c) of the Act, the cost to A of the inherited shares if;$100,000 being the fair market value of the inherited shares which are also capital property to A.

7. Since the shares are identical shares, the adjusted cost base of each of such shares then held by A will be determined pursuant to subsection 47(1) of the Act. A conversion feature will be added to the shares as contemplated by subsection 51(1) of the Act.

8. FA converts the inherited shares into a new class of shares having a paid-up capital equal to the paid-up capital of the old shares, but redeemable at their fair market value. The new shares are then redeemed for fair market value which will exceed the adjust cost base of the inherited shares as a result of the application of subsection 47(1) referred to in 7 above.

9. The excess of the redemption price over the paid-un capital is deemed to be a dividend for tax purposes of the country in which FA is a resident. (FA is a resident of a prescribed country.) The deemed dividend is subject to withholding tax in the prescribed country.

Except as discussed by telephone on March 9, 1982, we are generally in agreement with the interpretation of the Act as it currently reads, as set forth in your letter. It may not always be appropriate in the circumstances of a particular case, however, and in accordance with paragraph 24 of Information Circular 70-6R, it is not binding on the Department.

Yours truly,

ORIGINAL SIGNED BY ORIGINAL SIGNÉ PAR D. B. MORPHY

for Director Corporate Rulings Division Legislation Branch