Principal Issues: [TaxInterpretations translation] Does subsection 160(1) apply to the payment of a dividend through the issuance of shares by the dividend-declaring corporation followed by their redemption?
Position: General comments.
Reasons: Question of fact.
FEDERAL TAX ROUNDTABLE 7 OCTOBER 2011
APFF CONFERENCE 2011
Question 18
Application of section 160 in connection with a share redemption
PME Inc. is a private corporation. In 2007, it paid the holder of Class A common shares a dividend of $100,000 in the form of Class C preferred shares. In 2010, the Class C preferred shares were redeemed by their sole shareholder for $100,000, which was their fair market value ("FMV").
The decision rendered in Algoa Trust et al. v. The Queen (93 D.T.C. 405) makes it clear that the transfer of property does not include a share issued as a stock dividend. Furthermore, the following passage from the Algoa Trust decision leaves no doubt:
"The payment of a stock dividend is not a transfer of property. The shares authorized in a corporation's articles of incorporation are not assets of the corporation. When a person subscribes for the shares and pays the corporation for the shares, the shares are issued to that person and recorded in the share registry of the corporation. The payment is consideration for the shares. The issue of shares is not a transfer since the corporation has not divested itself of its property: the shares were never owned by the corporation. Assets are transferred for purposes of section 160 only at the time one person is divested of ownership of property and another person is vested in that property. Prior to issue and during issue the shares of a corporation are not property of that corporation.
When a corporation pays a stock dividend to its shareholders it issues shares to those shareholders. A corporation's paid-up capital is increased when it issues shares. The corporation is usually enriched, not impoverished, when shares are issued for consideration; when a corporation issues a stock dividend it is neither enriched nor impoverished. The value of the assets of the corporation are not reduced on the payment of a stock dividend. As a result of the stock dividend there are changes in the corporation's balance sheet; for example, accounts comprising shareholders equity are adjusted to reflect the increase in paid-up capital. These accounts, however, are not assets of the corporation."
That decision is consistent with CRA's strict interpretation of the meaning of the term "transfer of property", including a deduction for charitable donations (which will be denied) where a corporation wishes to issue shares of its capital stock to a charity.
Thus, as there was no transfer of property when paying the stock dividend, the shareholder liability provided for in section 160 could not therefore be applied by the tax authorities if PME Inc. had a "latent" or existing tax debt. On the other hand, following the redemption of the preferred shares in 2010, section 160 again could not be applied by the tax authorities, as there would have been a consideration (i.e. preferred shares transferred to PME Inc. by the shareholder) equal to the FMV of the property transferred by the corporation (i.e., the sum of $100,000 paid on the redemption).
Question to the CRA
Can the CRA confirm that it shares the above point of view with respect to the non-application of section 160 in such a case?
CRA Response
The Algoa Trust decision establishes, among other things, that the payment of a dividend through the issuance of shares by the dividend-declaring corporation does not constitute a transfer of property resulting in the application of subsection 160(1). That case does not constitute an authority that may be invoked to support the non-application of that provision to a stock dividend followed by a redemption thereof, or to support the argument that the shares so redeemed constitute consideration given for the property, being the redemption proceeds of the shares corresponding to their FMV.
We are of the view that the expression "transferred property, either directly or indirectly, by means of a trust or by any other means whatever" in subsection 160(1) must be interpreted broadly and allows the application of the provision to situations where multiple steps are performed. Where the shares of a corporation issued pursuant to a dividend declared by the corporation are subsequently redeemed, the existence of a transfer subject to subsection 160(1) is an issue that requires the analysis of all the facts of the particular situation.
If it is determined that the transactions result in a transfer subject to the application of subsection 160(1), the extent of the joint and several tax liability of the transferee will, in general, then have to be determined pursuant to 160(1)(e). In those circumstances, we are of the view that the determination of the existence of particular consideration for a property and the FMV of that consideration should be made in light of the particular facts of the situation under analysis. Regarding the situation submitted, it would be necessary, in particular, to consider that the right of the shareholder to receive payment on the redemption of the shares originates from the fact that these shares were issued in payment of a dividend in respect of other shares. In addition, the motives of the parties involved would be relevant. In that regard, the Federal Court of Appeal emphasizes that "the intention of the parties to defraud the CRA as a creditor can be of relevance in gauging the adequacy of the consideration given.” (footnote 1)
Yannick Roulier
(613) 957-2134
2011-041220
FOOTNOTES
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 The Queen v. Livingston, 2008 FCA 89, para. 19.