Principal Issues: As discussed in the scenario below, where a corporation acquires its own shares at a particular time on a day, which share acquisition results in an acquisition of control (AOC) of the corporation, when is the AOC of the corporation?
Position: The AOC of the corporation occurs at the time when the corporation acquires its own shares, such that the subsection 84(3) deemed dividend that arises on the corporation's acquisition of its own shares, is considered to be paid by the corporation in the new taxation year, and the dividend refund to the corporation, with respect to the subsection 84(3) deemed dividend, is for the new taxation year.
Reasons: See below.
2021 STEP CRA Roundtable – June 15, 2021
QUESTION 10. Acquisition of Control
The hypothetical fact situation is described as follows:
ACo, BCo and CCo are Canadian-controlled private corporations. All of the issued and outstanding shares of ACo are owned equally by BCo and CCo. BCo and CCo are not related under paragraph 251(2)(c), and deal at arm’s length with each other. Neither BCo nor CCo controls ACo. ACo’s taxation year ends on December 31 of each year.
At a particular time on November 1, 2020, ACo purchases for cancellation all of its shares owned by BCo for consideration that exceeds the aggregate paid-up capital of those shares, resulting in ACo being deemed to pay a dividend, as computed under subsection 84(3) (“Deemed Dividend”) at that time, to BCo.
ACo’s acquisition of its own shares owned by BCo results in CCo acquiring control of ACo (“the AOC”).
CCo’s AOC of ACo is a “loss restriction event” (as defined in subsection 251.2(2)). Unless ACo elects for it not to apply, subsection 256(9) will deem CCo to have acquired control of ACo at the beginning of November 1, 2020, and not at the particular time of CCo’s AOC of ACo on November 1, 2020, such that paragraph 249(4)(a) will deem ACo to have: (i) a deemed taxation year end immediately before the beginning of November 1, 2020, (i.e., the last moment of time on October 31, 2020), and (ii) a new taxation year commence at the beginning of November 1, 2020.
If an election is made for subsection 256(9) not to apply, paragraph 249(4)(a) will deem ACo to have: (i) a deemed taxation year end immediately before the particular time of the AOC on November 1, 2020; and (ii) a new taxation year commence at the particular time of the AOC on November 1, 2020.
ACo selects December 31, 2020 as the last day of its new taxation year (“New Taxation Year”) to coincide with its previous practice.
Assuming that ACo was entitled to receive a dividend refund as computed under paragraph 129(1)(a), with respect to the Deemed Dividend, can the CRA please confirm its position as to whether the dividend refund to ACo is for the taxation year deemed to end by paragraph 249(4)(a), or the New Taxation Year, in the situation both where ACo elects for subsection 256(9) to apply to the AOC and where it does not.
CRA Response
It is our view that, if an election is made under subsection 256(9), CCo would acquire control of ACo at the time when ACo acquires, and BCo disposes of, the ACo shares on November 1, 2020 and, therefore, paragraph 249(4)(a) would deem ACo’s taxation year to end immediately before that time.
However, if subsection 256(9) applies to deem CCo to have acquired control of ACo at the commencement of the day on November 1, 2020, paragraph 249(4)(a) would deem ACo’s taxation year to end immediately before that time, being the last moment of time on October 31, 2020.
In each case, the Deemed Dividend that arises on ACo’s acquisition of its own shares, would be considered to be paid by ACo in the New Taxation Year and, therefore, the dividend refund to ACo, with respect to the Deemed Dividend, computed under paragraph 129(1)(a), would be for its New Taxation Year.
Daniel Wong
2021-088319