Principal Issues: Whether the amount of the deemed dividend determined under paragraph 84.1(1)(b) in the situation described, would be affected by the application of subparagraph 69(1)(b)(i)
Position: No.
Reasons: Wording of the provisions.
XXXXXXXXXX 2007-022828
November 30, 2007
Dear XXXXXXXXXX:
Re: Paragraphs 69(1)(b) and 84.1(1)(b) of the Income Tax Act
We are writing in response to your letter dated March 21, 2007, wherein you asked a question concerning the interaction between paragraphs 69(1)(b) and 84.1(1)(b) of the Income Tax Act ("ITA") in the situation described below.
In this letter, unless otherwise stated, all references to a statute are to the ITA.
We understand the facts of the hypothetical situation described in your letter to be as follows:
1. XCO and YCO are "taxable Canadian corporations" within the meaning of the definition in subsection 89(1).
2. The issued and outstanding share capital of XCO consists of 100 common shares. The paid-up capital ("PUC"), within the meaning of the definition in subsection 89(1), of the 100 common shares of the capital stock of XCO is $1.
3. Mr. A is a person resident in Canada for the purposes of the ITA.
4. Mr. A is the owner of the 100 common shares of the capital stock of XCO and of all the issued shares of the capital stock of YCO. The adjusted cost base (within the meaning of the definition in section 54) of the 100 common shares of XCO held by Mr. A is $1.
5. Mr. A disposes of his 100 common shares of the capital stock of XCO in favour of YCO for a sale price of $800, the sole consideration consisting of a promissory note issued by YCO, payable on demand to Mr. A, with a principal amount and fair market value ("FMV") equal to $800. The contract for the transfer of shares does not include a price adjustment clause.
6. Following the transfer by Mr. A to YCO of the 100 common shares of the capital stock of XCO, it is determined that the FMV of the 100 common shares of XCO is $1,000 at the time of the transfer of the common shares to YCO.
Your question is whether the amount of the deemed dividend determined under paragraph 84.1(1)(b) in the situation described above, would be affected by the application of subparagraph 69(1)(b)(i).
Your view is that the application of subparagraph 69(1)(b)(i) would not increase the amount of the deemed dividend determined under paragraph 84.1(1)(b). In the situation described above, you believe that the amount of the deemed dividend would be $799 and the capital gain would be $200.
Our comments:
It is our view that, in a situation such as that described above, where the FMV of the shares transferred is higher than the FMV of the consideration received, the amount of the deemed dividend determined under paragraph 84.1(1)(b) would not be affected or increased because of the application of subparagraph 69(1)(b)(i) to the transaction.
In the situation described above, we agree that the deemed dividend would be $799 and the capital gain would be $200.
Our comments are based on the limited information provided to us and are limited to the question submitted. While we hope our comments are of assistance to you, however they do not address all of the potential income tax implications that could arise in a situation similar to the one described above.
Yours truly,
Maurice Bisson, CGA
for Director
Corporate Reorganizations and
Resources Industry Section
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch