Principal Issues: Does section 116 apply to a redemption of shares to which subsections 87(9) and 87(4) apply.
Position: Generally, no.
Reasons: Paragraph 45 of IT-474R2 and subsection 116(5.02).
July 18, 2011
Michael Chun HEADQUARTERS
Manager A. Seidel, CMA
International Policy Section (613) 957-2058International and Large Business Directorate
2011-039174
Treaty Protected Property
This is in response to your January 4, 2011 e-mail in which you requested our assistance in determining whether section 116 of the Income Tax Act (the "Act") would apply to the disposition of the shares of a Canadian corporation in the situation described below.
Background
1. Parent is a non-resident corporation incorporated under the laws of a country with which Canada has a tax treaty.
2. Parent owns all of the shares of Holdco, a corporation incorporated under the laws of, and resident in, Canada.
3. Canco is a wholly-owned subsidiary of Holdco. Canco is a corporation incorporated under the laws of, and is resident in, Canada. Canco's shares derive their value principally from real or immovable property situated in Canada.
4. Holdco's shares derive all of their value from the shares of Canco such that the shares of Holdco are "taxable Canadian property" within the meaning thereof in subsection 248(1) of the Act, to Parent. The shares of Holdco are "treaty-protected property" within the meaning thereof in subsection 248(1) of the Act.
5. Canadian Parent owns all of the shares of CanSub. Canadian Parent and CanSub are corporations incorporated under the laws of, and are resident in, Canada. Canadian Parent is not related to Parent.
6. Parent and Canadian Parent enter into an agreement to amalgamate Holdco and CanSub pursuant to subsection 87(9) of the Act to form Amalco. Parent will receive new shares of Canadian Parent as consideration for its shares of Holdco and Canadian Parent will receive all of the shares of Amalco as consideration for its shares of CanSub.
Issue
Does section 116 of the Act apply to Parent's disposition of the shares of Holdco?
Our Comments
In general, subsections 116(1), 116(3) and 116(5) of the Act do not apply to a non-resident's disposition of, and a purchaser's acquisition of, taxable Canadian property where such property is "excluded property" within the meaning thereof in subsection 116(6) of the Act. Pursuant to paragraph (i) of that definition, excluded property includes a property that is, at the time of its disposition, a treaty-exempt property of the non-resident person. Pursuant to subsection 116(6.1) of the Act, where the non-resident person disposing of the property is not related to the purchaser of the property, a property is a treaty exempt property of a non-resident person if it is a treaty-protected property. It is therefore our view that, in the corporate reorganization described above, section 116 of the Act would not apply to Parent's disposition of the shares of Holdco.
In the situation where all of the above background facts were the same except that Parent and Canadian Parent were related at the time of the amalgamation, the shares of Holdco would not qualify as excluded property. Although the purchaser could file the notice described in subsection 116(5.02) of the Act to give, pursuant to subsection 116(6.1), the shares of Holdco held by Parent excluded property status under paragraph 116(6)(i), it is our view that Parent and the purchaser could rely on the CRA's position in paragraph 45 of Interpretation Bulletin IT-474R2 ("IT-474R2") to not have to comply with the requirements of section 116 of the Act.
Paragraph 45 of IT-474R2 expresses the CRA's view that, where subsection 87(4) of the Act deems the new shares of Canadian Parent held by Parent to be taxable Canadian property because the old shares (the Holdco shares) were taxable Canadian property of Parent, Parent need not comply with the procedures set out in section 116 in respect of the deemed disposition of the old shares. In the corporate reorganization described above, subsection 87(4) of the Act applies as a result of paragraph 87(9)(a). Paragraph 87(9)(a) deems, for the purposes of subsection 87(4), the shares of Canadian Parent received by Parent to be shares of Amalco and then the post-amble to subsection 87(4) deems these shares of Amalco to be taxable Canadian property of Parent.
We trust that these comments are of assistance. If you wish to discuss any of the above, please contact the writer.
Yours truly,
for Director
International & Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch