| 920166 | |
| 19(1) | M.P. Sarazin |
| (613) 957-2118 |
April 24, 1992
Dear Sir:
Re: Subsection 84(3) of the Act - Deemed Dividends
We are writing in response to your letter dated January 13, 1992 wherein you requested a technical interpretation on the application of subsection 84(3) of the Income Tax Act (Canada) (the "Act") to the following situation.
Facts
24(1)
24(1)
You would like to know whether or not the share redemptions, described in the above scenario, would be subject to the provisions of subsection 84(3) of the Act and, if so, are there any relieving provisions available under the Act? If a prospective member bought his share directly from another member and Company A holds the share in escrow until the initiation fee is fully paid, would the transaction result in a capital gain to the vendor?
It appears that the interpretation you seek relates to proposed transactions to be undertaken by specific taxpayers and, therefore, we bring to your attention Information Circular 70-6R2 dated September 28, 1990 issued by Revenue Canada, Taxation. Confirmation with respect to proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. If you wish to obtain an advance income tax ruling for particular taxpayers with respect to specific transactions which are contemplated, a written request for an advance income tax ruling can be submitted in accordance with the Information Circular. Nevertheless, we can offer the following general comments.
The provisions of subsection 84(3) apply to any situation where a corporation resident in Canada has redeemed, acquired or cancelled any of the shares of any class of its capital stock. The corporation is deemed to have paid and the shareholder is deemed to have received a dividend equal to the amount by which the amount paid by the corporation on the redemption of a share exceeds the paid-up capital in respect of the particular share. Any amounts credited to the corporation's contributed surplus account do not form part of the paid-up capital of the share. Consequently, to the extent that the original premium paid by the shareholder is returned as part of the share's redemption amount, it will be paid to the shareholder in the form of a taxable dividend pursuant to paragraph 84(3)(a) of the Act. This result may, in circumstances described in paragraph 84(1)(c.3) of the Act, be avoided by having the corporation convert contributed surplus to paid-up capital. However, it is likely that the corporation will need to amend its charter or articles of incorporation to enable it to do so. "Paid-up capital" has the meaning assigned by paragraph 89(1)(c) of the Act.
Generally, where a person holds a share in a particular corporation as capital property and the person then sells the share to another person other than the particular corporation, any gain or loss on the disposition of the share, including the redemption thereof, would be included in the persons income under the provisions of section 38 of the Act. However, should the share constitute personal-use property to the shareholder then any loss on the disposition of the share would be deemed to be nil pursuant to subparagraph 40(2)(g)(iii) of the Act. All of the facts in each situation would have to be reviewed in order to determine whether the share would be considered personal-use property and whether the disposition of the share constitutes a redemption thereof by the particular corporation.
Our comments herein are provided in accordance with the practice referred to in paragraph 21 of Information circular 70-6R2.
Yours truly,
for DirectorReorganizations and Foreign DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch