XXXXXXXXXX
Attention: XXXXXXXXXX
Dear Sirs:
Re: Taxation of payments made to dissenting shareholders on an amalgamation
This is in reply to your letter of June 3, 1993 concerning the above-noted subject wherein you requested our view regarding the application of section 84.1 of the Income Tax Act (the "Act") to the following hypothetical situation. We apologize for the delay.
1. A Co. and B Co. are Canadian-controlled private corporations. H and W are husband and wife.
2. H owns 100% of the shares of A Co. and 75% of the issued and outstanding common shares of B Co.
3. W owns 25% of the issued and outstanding common shares of B Co.
4. H and W have separated and are in the course of settling the rights arising from their marriage.
5. H causes an amalgamation of A Co. and B Co. to be approved under the provisions of section 183 of the Canada Business Corporations Act (the "CBCA").
6. W takes all appropriate steps as provided under subsection 190(5) to (8) of the CBCA to exercise her right of dissent and demand payment.
7. An amalgamation subsequently takes place and W ceases to have any rights as a shareholder other than to be paid the fair market value of her shares pursuant to subsection 190(1) of the CBCA.
8. The amalgamated corporation ("Amalco") pays an amount determined by H and W to be the fair market value of W's B Co. shares to W. The amount exceeds the paid-up capital and adjusted cost base of her B Co. shares.
Our comments
In general, it is our opinion that the provisions of subsection 84(3) of the Act will not operate to deem a shareholder to have received a dividend where the shareholder dissents to an amalgamation utilizing paragraph 190(1)(c) of the CBCA and receives payment for his shares from the amalgamated corporation in accordance with subsection 190(3) of the CBCA. We also concur with your view that, under such circumstances, section 84.1 and subsections 15(1) and 246(1) of the Act would not be applicable.
However, a thorough review of all the facts surrounding the transactions is necessary in order to determine the possible application of subsection 245(2) of the Act.
Where a payment to a shareholder pursuant to his/her right of dissent arises as a result of transactions the primary purpose of which is to realize a distribution of corporate surplus that is taxed as a capital gain rather than a dividend and the capital gains are taxed at a lower rate, it is our view that it would constitute an avoidance transaction and subsection 245(2) would be applicable unless it is not considered to result in an abuse of the Act for the purposes of subsection 245(4) of the Act.
The Act contains several provisions designed to prevent the conversion of dividends into proceeds of disposition. In particular, section 84.1 describes the circumstances in which consideration received by an individual on the disposition of shares of a corporation should be considered to have been received as a dividend. Transactions contrived to avoid the application of section 84.1 would be considered to result in an abuse for the purposes of subsection 245(4) of the Act. In this regard, paragraph 25 of the Information Circular 88-2 states the following: "Provisions, such as those mentioned above (e.g. section 84.1 of the Act), indicate the circumstances in which amounts received by a shareholder of a corporation from the corporation on a disposition of shares or other property are to be accounted for as a dividend. If as a result of a series of transactions a shareholder realizes a capital gain on the disposition of property and a transaction in the series is an avoidance transaction, subsection 245(2) will be applied to the transaction if it is determined that the series of transactions was carried out to thwart the purpose of the provision in question."
The foregoing comments are given in accordance with the practice referred to in paragraph 21 of Information Circular 70-6R2 and are not binding on Revenue Canada, Taxation.
Yours truly
for DirectorReorganizations and Foreign DivisionIncome Tax Rulings and Interpretations DirectoratePolicy and Legislation Branch