25 September 1981 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.

DATE SEP 25 1981

TO-A Mr. R.S. Hall                  
     Director                       Corporate Rulings Division  
     Policy & Systems Branch        R. Bédard                   
     Specialized Audit Division     6-1834                      
                                    Ref: 7-1286                 
ATTENTION Mr. D. Burton

RE XXXX

This is in reply to your memorandum of March 13, 1981 requesting an interpretation of subparagraph 95(1) (a)(iii) in the following situation:

1. A United Kingdom company (UKCO) owns 1007 of the voting shares of a Canadian company (Canco) and 100% of the voting shares of a Bermudian company (Bermco).

2. Canco owns 100% of all the non-voting preferred shares of Bermco.

3. Canco does not own any voting share. of either Bermco or UKCO.

In these circumstances it is our view that Bermco is not a controlled foreign affiliate of Canco.

However, subsections 15(1), 56(2), 245(2) and 214(3) could be considered if the consideration paid by Canco for the non-voting preferred shares exceeds the fair market value thereof. For example, the fair market value of the non-voting preferred shares issued by Canco by Bermco could be greatly reduced if they are not re- deemable at the option of the holder.

The taxation of a benefit in the hands of UKCO could also be considered if the FMS' of the preferred shares issued to Canco reduced as a result of transactions made by Bermco such as

a) a sale of property to UKCO at less than FMV

b) an acquisition of property from UKCO for more than FMV; or

c) an interest free loan to UKCO.

Similarly, a benefit would be conferred in every taxation year in which Canco has an outstanding balance receivable on an interest free loan to UKCO. An argument could be made that the same principle would apply if the preferred shares issued to Canco by Bermco are not, before any dividend is paid to UKCO, entitled to cumulative dividends at a reasonable rate which in our view should be approximately equal to the commercial rate of interest that would be charged on a promissory note by an arm's length lender in similar circumstances.

Original Signed by J. R. ROBERTSON

Director General Corporate Rulings Directorate Legislation Branch

95(1)(a)(iii) 15(i) 56(2)