Principal Issues: The situation is one where: Three children, X,Y and Z are the only beneficiaries of the Estate of Individual A, which owns all the shares of Corporation A, a Canadian-controlled private corporation. Corporation A has a capital dividend account (CDA) and a refundable dividend tax on hand (RDTOH), but owns no assets. On the other hand, X owns all the shares of Corporation X, a Canadian controlled private corporation. Corporation X intends to buy all the shares of Corporation A. After the amalgamation of Corporations A and X, the amalgamated corporation would pay a capital dividend to X. 1. Does subsection 83(2.1) apply in the particular situation? In the affirmative, does subsection 83(2.2) or 83(2.4) apply? 2.Would the answer be different if X, Y or Z owned directly the shares of Corporation A before the transfer to Corporation X? 3. Does subsection 129(1.2) apply in the particular situation
Position: 1. and 2. General comments.
3. Yes.
Reasons: 1. and 2. Question of fact.
3. Conditions for the application of subsection 129(1.2) are met.
2008-029637 XXXXXXXXXX Lucie Allaire, Advocate, CGA, D. Fisc. (613) 957-2046 June 29, 2009
Dear XXXXXXXXXX,
Re: Subsections 83(2.1), 83(2.2), 83(2.4) and 129(1.2) of the Income Tax Act
This is in response to your request for a technical interpretation dated October 8, 2008, in which you asked for our opinion on the application of subsections 83(2.1), 83(2.2), 83(2.4) and 129(1.2) of the Income Tax Act (the "Act") in the context of a particular situation. We apologize for the delay in responding to your request.
Unless otherwise indicated, any statutory reference herein is to a provision of the Act.
1) Particular Situation
You presented us with the following situation in the context of your request for technical interpretation (the "Particular Situation").
1. Individuals X, Y, and Z, all of whom are related persons resident in Canada, are the children and sole heirs of A.
A's estate holds all of the shares of Corporation A, a "Canadian-controlled private corporation" as defined in subsection 125(7) ("CCPC"). Corporation A has a "capital dividend account" as defined in subsection 89(1) ("CDA") and a balance of "refundable dividend tax on hand" as determined by virtue of subsection 129(3) ("RDTOH"). Other than the balance in these tax accounts, Corporation A has no assets.
2. X holds all of the shares of Corporation X, a CCPC. Corporation X holds various assets, but its CDA and RDTOH balances are nil.
3. Corporation X purchased the shares of Corporation A, previously held by the estate of A. Following this acquisition, Corporations A and X were amalgamated and the new amalgamated corporation elected under subsection 83(2) to pay a dividend to shareholder X.
4. You specified that one of the main purposes of the transactions described above was to allow Corporation X to benefit from Corporation A's CDA and RDTOH. In previous years, Corporation A paid significant amounts of RDTOH on its investment income.
2) Your Questions
You asked us to answer the following questions:
A. Would subsection 83(2.1) apply to the Present Situation? If so, would the transaction fall within one of the exceptions in subsections 83(2.2) or 83(2.4)?
B. Would the answer to question A be different if there were no amalgamation?
C. Would the answer to question A be different if X, Y and Z had each personally held the shares of Corporation A prior to the acquisition of those same shares by Corporation X?
D. Would subsection 129(1.2) apply to the Present Situation to deem the dividend paid by the amalgamated corporation to be a non-taxable dividend, thereby preventing it from claiming a dividend refund?
3) Our Comments on this Request
General
It appears to us that the situation described in your letter may constitute an actual situation involving taxpayers. As explained in Information Circular 70-6R5, it is not the practice of this Directorate to provide comments on proposed transactions involving specific taxpayers otherwise than in the form of an advance income tax ruling. If your situation involved specific taxpayers and one or more completed transactions, you should submit all relevant facts and documents to the appropriate Tax Services Office for its opinion.
However, we are able to offer the following general comments that you may find useful. It should be noted that the application of one or more provisions of the Act generally requires the analysis of all the facts relating to a particular situation. As a result, and given that your letter only summarily describes a particular situation, the comments we make below may not apply in full in the particular situation.
The potential application of subsections 83(2.1), 83(2.2) and 83(2.4) requires the analysis of all documents, facts and circumstances relating to a particular situation. Given that the Particular Situation is described only in a summary fashion, it is difficult for us to make a definitive statement as to the potential application of these legislative provisions.
Among other things, the composition of Corporation A's CDA should be determined to ensure that all or substantially all of its CDA consists of amounts other than amounts referred to in paragraphs 83(2.2)(a) to (d) or paragraphs 83(2.4)(a) to (e). In particular, there is no mention of whether Corporation X was related to Corporation A at any relevant time when amounts were added to Corporation A's CDA. In addition, no information is provided as to who the executors of the estate are. As a result, it is impossible to determine whether Corporation A and Corporation X are related persons at the time that Corporation X acquired the shares of Corporation A. Furthermore, we understand that you have assumed that the exception in subsection 83(2.3) does not apply in this case.
It is therefore with reservations that we make the following general comments.
Comments- Question A
Subsection 83(2.1) provides, inter alia, that a capital dividend received by a shareholder and paid by a corporation on a share is deemed to be a taxable dividend to the shareholder if the shareholder acquired the share in a transaction or series of transactions, one of the main purposes of which was to receive that dividend. However, the dividend retains its character as a capital dividend for purposes of Part III tax and the calculation of the corporation's CDA.
In the Particular Situation, it is stated that one of the main purposes of the acquisition of the shares of Corporation A is to enable Corporation X to benefit from Corporation A’s CDA; therefore, subsection 83(2.1) would prima facie be applicable here.
However, consideration must also be given to whether the exception in subsection 83(2.4) might be applicable. Subsection 83(2.4) provides that subsection 83(2.1) does not apply to a dividend paid by a particular corporation on a share of its capital stock, to a corporation related to it, in respect of which an election has been made under subsection 83(2), if all or substantially all of the particular corporation's CDA immediately before the dividend became payable could reasonably be considered to consist of amounts not described in paragraphs 83(2.4)(a) to (e).
Furthermore, where an amalgamation of two corporations occurs, as in the Present Situation, paragraph 87(2)(z.1) provides the rules for determining the capital dividend account of the corporation resulting from the amalgamation of the predecessor corporations.
In particular, paragraph 87(2)(z.1) provides, inter alia, that for the purpose of computing the amount of its CDA, the amalgamated corporation is deemed to be the same corporation as, and a continuation of, each predecessor corporation. Thus, paragraph 87(2)(z.1) generally permits the transfer of the CDA from a predecessor corporation to the amalgamated corporation.
However, paragraph 87(2)(z.1) provides a special rule where subsection 83(2.1) would apply to a predecessor corporation if a dividend were paid by it immediately before the amalgamation and an election under subsection 83(2) were made in respect of the full amount of that dividend. Where a portion of the dividend would be deemed to be a taxable dividend paid by the predecessor corporation under subsection 83(2.1), the CDA of the predecessor corporation is not transferred to the amalgamated corporation.
In the Particular Situation, paragraph 87(2)(z.1) would apply as a result of the amalgamation of Corporation A and Corporation X. The issue to be resolved, therefore, is whether the exception in subsection 83(2.4) from the application of subsection 83(2.1) would apply if a notional dividend equal to the CDA of Corporation A was paid to Corporation X immediately before the amalgamation.
Although the notional dividend paid by Corporation A to Corporation X would be paid to a corporation related to it, it is not possible for us to determine in the Particular Situation whether all or substantially all of Corporation A's CDA, immediately before the payment of such a dividend, could reasonably be considered to consist of amounts not described in paragraphs (a) to (e) of subsection 83(2.4). Among other things, it cannot be determined in the Present Situation whether any part of the CDA of Corporation A represents an amount of CDA realized by a corporation before it became related to Corporation X.
It is possible, in the Present Situation, that the CDA of the corporation resulting from the merger is nil. In such a case, the corporation resulting from the amalgamation would therefore not be able to pay a capital dividend to shareholder X. Therefore, in these circumstances, we do not feel it is necessary to comment on the exception in subsection 83(2.2).
Comments- Question B
With respect to your second question, it is difficult for us to answer it because, assuming there is no amalgamation, it is not established in your question how the CDA of Corporation A could ultimately be paid to shareholder X.
In this regard, it should be noted that the rules for calculating the CDA of an amalgamated corporation under paragraph 87(2)(z.1) also apply in determining the CDA of a parent corporation in the context of a subsection 88(1) winding-up by virtue of paragraph 88(1)(e.2).
In addition, in the Present Situation, if a simple subscription for shares of the capital stock of Corporation A by Corporation X, which shares would have a low paid-up capital and a high redemption value, could give rise to the application of subsection 83(2.1) upon redemption, despite the exception in subsection 83(2.4), any proposed alternative to avoid the application of subsection 83(2.1) would require further analysis.
Comments- Question C
Our comments on Question A also apply in the event that the shares of Corporation A, after distribution to the beneficiaries of A's estate, are acquired by Corporation X. As with the base situation in the Particular Situation, it is possible that, in this variation of the base situation, subsection 83(2.1) may or may not apply, depending on the particular circumstances of a particular case, taking into account the exception in subsection 83(2.4). However, this cannot be determined in the Particular Situation.
Comments- Question D
Subsection 129(1.2) provides, inter alia, that, for the purposes of subsection 129(1), a dividend paid on a share of the capital stock of a corporation is deemed not to be a taxable dividend if the shareholder acquired the share in a transaction, or as part of a series of transactions, one of the main purposes of which was to enable the corporation to obtain a dividend refund. In contrast to the application of subsection 83(2.1), there are no exceptions to the application of subsection 129(1.2).
In the Particular Situation, it is stated that one of the main purposes of the acquisition of the shares of Corporation A is to allow Corporation X to benefit from Corporation A’s RDTOH; therefore, subsection 129(1.2) would, prima facie, be applicable to any dividend that is paid by Corporation A to Corporation X for the purpose of obtaining a dividend refund.
Furthermore, where an amalgamation of two corporations occurs, as in the Particular Situation, paragraph 87(2)(aa) provides, for calculating the RDTOH of the amalgamated corporation, rules similar to those in paragraph 87(2)(z.1) to determine the CDA of the corporation resulting from the amalgamation of the predecessor corporations. In particular, paragraph 87(2)(aa) provides the same deeming rule for a notional dividend paid by the predecessor corporation immediately before the amalgamation in determining the RDTOH of the corporation resulting from the amalgamation of the predecessor corporations.
Consequently, in the Particular Situation, it appears to us that the RDTOH of Corporation A could not be transferred to the amalgamated corporation because of the application of paragraph 87(2)(aa).
We hope that our comments are of assistance.
Best regards,
Maurice Bisson, CGA
Manager
Corporate Reorganizations and Resource Industries Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.