Principal Issues: Whether a private corporation could make a capital dividend election pursuant to 83(2) in regards to a deemed dividend under 84.1(1)(b)?
Position: Yes.
Reasons: Question of fact
XXXXXXXXXX 2006-018385 Marc LeBlond May 30, 2007
Dear Sir,
Subject: Subsections 83(2) and 84.1(1) of the Income Tax Act
This is in response to your letter of April 21, 2006, in which you requested our comments on the above subject in relation to the situation described below. We apologize for the delay in responding to this request.
Unless otherwise indicated, all statutory references herein are to provisions of the Income Tax Act (the "Act").
Particular Situation
- Mr. X holds preferred shares in the capital stock of Opco 1 with a redemption value of $5 million and a "paid-up capital", as defined in subsection 89(1), and an "adjusted cost base", as defined in section 53, of nil. The preferred shares of the capital stock of Opco 1 are "capital property", as defined in section 54, to Mr. X.
- The remaining shares of Opco 1 are held by "related persons", as defined in subsection 251(2), to Mr. X.
- Mr. X also holds voting and non-participating shares of the capital stock of Opco 2, a "private corporation" as defined in subsection 89(1).
- The remaining shares of Opco 2 are held by "related persons", as defined in subsection 251(2), to Mr. X.
- Opco 2 has a "capital dividend account", as defined in subsection 89(1), of $5 million.
- Mr. X transfers his preferred shares of the capital stock of Opco 1 to Opco 2 and receives a note with a principal amount of $5 million in exchange from Opco 2. This transfer is subject to the application of section 84.1.
- Following the application of paragraph 84.1(1)(b), a dividend of $5 million is deemed to have been paid by Opco 2 to Mr. X and received by him.
Your Question and Analysis
You are asking us to confirm that, in the Particular Situation, Opco 2 would be able to make the subsection 83(2) election in respect of the full amount of the deemed paragraph 84.1(1)(b) dividend of $5 million, in the prescribed form and manner, so that it would be deemed to be a capital dividend, pursuant to paragraph 83(2)(a).
In your view, in the particular situation, the deemed dividend pursuant to paragraph 84.1(1)(b) should be eligible for election pursuant to subsection 83(2) by Opco 2. In summary, you argue that the conditions for the application of subsection 83(2) are satisfied, particularly that: [TaxInterpretations translation]
Since Opco 2 is deemed to have paid a dividend to Mr. X, we can conclude that the dividend is payable by Opco 2. Furthermore, since Mr. X was a shareholder of Opco 2 immediately before the dividend was paid, the dividend payable by Opco 2 is payable to a shareholder of any class of shares of the capital stock of Opco 2.
Our Comments
It appears to us that the situation described in your letter may be 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. However, we are able to offer the following general comments that may be helpful. It should be noted that the application of one or more provisions of the Act generally requires an analysis of all the facts relating to a particular situation. Consequently, and given that your letter only briefly describes a hypothetical situation, the comments we provide below may not be fully applicable in a particular situation.
It should also be noted that the above question is essentially aimed at obtaining the opinion of the Canada Revenue Agency (the "CRA") with respect to the application of subsections 84.1(1) and 83(2) and that our comments are limited to that aspect of the transactions. Consequently, and given that the statement of the Particular Situation only briefly describes a hypothetical particular situation, the comments below should in no way be construed as addressing other tax consequences that may arise from the Particular Situation.
For the purposes of subsections 84.1(1) and 83(2), subsection 84(7) provides that a dividend deemed to have been paid pursuant to section 84.1 is deemed to have become payable at that time.
On the issue of whether a subsection 83(2) election is available to a corporation in respect of a dividend that it is deemed to have been paid pursuant to paragraph 84.1(1)(b), we are of the view that such an election is available if such a dividend becomes payable by a private corporation to a shareholder who already holds shares of any class of the corporation's capital stock, as is the case in the Particular Situation.
As stated in Information Circular 70-6R5, this opinion is not an advance income tax ruling and is not binding on the CRA in respect of any particular factual situation.
We hope that these comments are of assistance.
Best regards,
Maurice Bisson, CGA
Manager
Corporate Reorganizations and Resource Industries Section
Corporate Reorganizations and Resource Industries Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.