Principal Issues: [TaxInterpretations translation] Does subsection 212.1(1) apply in this situation?
Position: Yes.
Reasons: The situation is covered in the preamble to subsection 212.1(1). The Department of Finance has not implemented one of the measures announced in the 1998 budget in order to continue further studies and has not announced any new measures that would exempt the non-resident in this situation.
XXXXXXXXXX 2006-019210 Sylvie Labarre,CA July 11, 2007
Dear Sir,
Subject: Transfer of shares by a non-resident person
This is in response to your letter of June 8, 2006, requesting our opinion on the application of subsection 212.1(1) of the Income Tax Act (the "Act") in the following hypothetical situation. We apologize for the delay in responding to this request.
An individual, resident in France, holds the shares of a Canadian corporation whose assets consist entirely of real estate located in Canada. The individual acquired those shares at the time of the death of the individual’s spouse, also a resident of France. The individual's spouse was taxed in Canada on the gain on the deemed disposition of the shares so that the individual's adjusted cost base of the shares is equal to the fair market value of the shares at the time of the spouse's death. The individual's shares have a low paid-up capital.
The individual disposed of all of the shares of the Canadian corporation to another Canadian corporation (of which the individual owns all of the shares) in exchange for a note in an amount equal to the individual's adjusted cost base of the shares (which is also the fair market value of the shares).
You wish to know whether subsection 212.1(1) applies to tax the excess of the amounts received by the individual on the disposition of the shares over the paid-up capital of the shares.
Our Comments
As stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, it is the practice of the Canada Revenue Agency (CRA) not to issue written opinions on proposed transactions otherwise than through advance rulings. Furthermore, when it comes to determining whether a completed transaction has received appropriate tax treatment, that determination is made first by our Tax Services Offices as a result of their review of all facts and documents, which is usually performed as part of an audit engagement. However, we can offer the following general comments that we hope may be helpful to you. These comments may, however, under certain circumstances, not apply to your particular situation.
In this situation, a non-resident person disposes of shares of a class of the capital stock of a corporation resident in Canada (the "subject corporation") to another corporation resident in Canada with which the non-resident does not deal at arm's length. Immediately after the disposition, the subject corporation is connected with the purchaser within the meaning of the preamble to subsection 212.1(1). Consequently, the consequences set out in subsection 212.1(1) apply in this situation such that the excess, if any, of the fair market value of the note received for the shares over the paid-up capital of the shares would be deemed to be a dividend received by the non-resident from the purchaser.
You stated that this situation is one that was to be excluded from the application of subsection 212.1(1) because of what was stated in the 1998 budget. However, the Department of Finance press release dated October 27, 1998, indicated that the legislation to implement that part of the budget proposal should both limit the application of that measure to the situations referred to by the Department of Finance and block other methods of avoidance and that further study would be required to achieve that end. The press release therefore announced that the measure foreseen in the budget would not be implemented for the time being. The Department of Finance has not made any changes to subsection 212.1(1) since that time and has therefore not implemented the measure originally announced.
The CRA's mandate is to administer the Act as written, while the responsibility for tax policy development and amendments to the Act rests with the Department of Finance. If you wish to make representations concerning amendments to the Act, you may send your comments to the Department of Finance, Tax Policy Branch, Tax Legislation Division, L'Esplanade Laurier, 140 O'Connor Street, 17th Floor, East Tower, Ottawa, Ontario, K1A 0G5.
We hope that these comments are of assistance.
Best regards,
Alain Godin
for the Director
International Operations and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.