Canco owned 100% of the preferred shares of a Barbados International Business Company (“FA”), all of whose common shares are held by a non-resident corporation that is not a foreign affiliate of Canco. FA was a controlled foreign affiliate of Canco., Prior to 19 August 2011, FA redeemed all the preferred shares (with particulars of the redemption resolution redacted). Canco made no s. 93(1) election.
Barbados law is silent about the characterization of an amount received upon the redemption of shares of a Barbadian company, but…does not prevent a corporation from treating such amount, or a part thereof, as a dividend.
CRA responded:
[Although] subsection 90(2)…may apply earlier [than August 19, 2011] if a certain election has been filed…whether… subsection 90(2) applies is likely to not matter as, if there is in fact a distribution that is separate from the redemption…[as] the determination of the treatment of the proceeds… will…depend on whether legally there is, in part, a distribution of certain funds in the form of a dividend and, in another part, proceeds from a redemption of shares. If there is only, as a matter of law, a redemption and cancellation of shares, or if there is no conclusive evidence as to whether there is, in part, a dividend, we would generally view all such amounts as having been received as proceeds from the disposition of the… Shares, and no amount as having been received as a dividend. In this event, you may want to consider whether the taxpayer may be eligible to make a late [93(1)] election… .
If there is, in part, a dividend… to the extent the purpose… is to skew exempt surplus to the Canadian shareholder…consideration [should] be given as to the potential application of subsection 95(6) and/or subsection 245(2).