Principal Issues: Eight individuals own all of the issued and outstanding shares of a corporation ("Opco"). The eight individuals deal with each other at arm's length. Opco is controlled by a group of three individuals. One of the members of the control group ("A"), owning 18.75% of the Opco shares, would dispose of all of his or her Opco shares in favour of another corporation ("Holdco") for fair market value consideration (other than shares of the capital stock of Holdco). All of the issued and outstanding shares of Holdco would be owned, at any relevant time, by the remaining seven individuals that own shares in the capital stock of Opco. Whether section 84.1 would apply in the given fact situation. More specifically, whether A would be deemed not to deal at arm's length with Holdco pursuant to paragraph 84.1(2)(b) of the Act.
Position: A would not be deemed not to deal at arm's length with Holdco pursuant to paragraph 84.1(2)(b) of the Act. However, paragraph 251(1)(c) of the Act provides that, at a particular time, it is a question of fact whether unrelated persons are dealing with each other at arm's length. Such determination can only be made following the review of all facts relating to a particular situation. With respect to the given fact situation, it is impossible to establish whether A and Holdco would deal with each other at arm's length. Consequently, it is impossible to confirm that section 84.1 would not apply in the given fact situation.
Reasons: Wording of the Act.
2004-010432
XXXXXXXXXX S. Prud'Homme
(613) 957-8975
December 7, 2004Dear Sir,
Subject: Request for technical interpretation - section 84.1
This is in response to your email of November 19, 2004, in which you requested our opinion regarding the potential application of section 84.1 of the Income Tax Act (the "Act") in a particular situation.
Unless otherwise indicated, all statutory references herein are to provisions of the Act.
It appears to us that the situation described in your letter and summarized below 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. If your situation involved specific taxpayers and one or more completed transactions, you should submit all relevant facts and documentation to the appropriate Tax Services Office for its opinion. 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. Accordingly, 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.
1) Particular Situation
You have presented us with the situation described below (the "Particular Situation") as part of your request for a technical interpretation.
(a) Eight individuals ("A", "B", "C", "D", "E", "F", "G" and "H") held all of the issued and outstanding shares of the capital stock of a corporation ("Opco"). Specifically, each of A, B, C and D held 18.75% of the issued and outstanding shares of the capital stock of Opco. Each of E, F, G and H held 6.25% of the issued and outstanding shares of the capital stock of Opco. A, B and C formed a group of persons who had legal (de jure) control of Opco.
The eight individuals referred to above dealt with each other at arm's length.
(b) A sold all of A’s shares of the capital stock of Opco to another corporation ("Holdco"), for non-share consideration equal to the fair market value of the shares disposed of.
(c) B, C, D, E, F, G and H held all of the issued and outstanding shares of the capital stock of Holdco at all relevant times. Specifically, each of B and C held 23% of the issued and outstanding shares of the capital stock of Holdco. D held 22% of the issued and outstanding shares of the share capital of Holdco. Finally, each of E, F, G and H held 8% of the issued and outstanding shares of the capital stock of Holdco.
We understand that immediately following the disposition of the shares of the capital stock of Opco to Holdco, Opco was connected to Holdco (within the meaning of subsection 186(4)). Furthermore, we have assumed that all parties involved in the Particular Situation are resident in Canada.
2) Your Question regarding the Particular Situation
You wish to know whether section 84.1 applied in the particular situation. Specifically, you wish to know whether A was deemed to not deal at arm's length with Holdco by virtue of paragraph 84.1(2)(b).
3) Our Comments on the Particular Situation
We are of the view that, in the Particular Situation, A would be deemed to not deal at arm's length with Holdco by virtue of paragraph 84.1(2)(b).
However, and in accordance with paragraph 251(1)(c), whether or not unrelated persons are not dealing with each other at arm's length at a particular time is a question of fact. Thus, unrelated persons may or may not be dealing at arm's length, depending on the facts and circumstances of a particular situation. In this regard, each transaction or series of transactions must be considered individually. With respect to the Particular Situation, it is impossible for us to determine whether Holdco and A were not dealing at arm's length with each other since such a determination would require an analysis of all the facts and circumstances relating to a particular situation and your letter only broadly describes a hypothetical situation. However, we refer you to paragraphs 22 to 26 of Interpretation Bulletin IT-419R2, Meaning of Arm's Length, dated June 8, 2004, which set out the general guidelines followed by the Canada Revenue Agency in determining whether or not persons are dealing with each other at arm's length at a particular time. Paragraph 23 of Interpretation Bulletin IT-419R2 states, inter alia, that the following criteria have generally been used by the courts in determining whether parties to a transaction are not dealing at “arm's length”:
- a common mind directs the bargaining for both parties to a transaction;
- the parties to a transaction act in concert without separate interests;
- there was effective (de facto) control.
In view of the above, we are unable to confirm that section 84.1 would not be applicable in the Particular Situation in respect of the disposition of the shares of the capital stock of Opco by A to Holdco.
In conclusion, because your letter only briefly describes a hypothetical situation, we are unable to comment on the other tax consequences that may result from the Particular Situation.
We hope that our comments are of assistance.
Best regards,
Stéphane Prud'Homme, Notary, M.Fisc.
For the Director
Corporate Reorganizations and Resource Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch