| June 12, 1990 | |
| Calgary District Office | Specialty Rulings |
| Room 350 | Directorate |
| International Audit | G. Arsenault |
| (613) 957-2126 | |
| Attention: C. Wells | |
| File No. 7-4619 |
Subject: 24(1) Dividends/Reduction of Capital
This is response to your memorandum to Head Office, International Audit Division dated December 20, 1989 and in confirmation of the telephone conference between G. Arsenault and C. Wells on May 16, 1990.
We consider the proper treatment of the "dividends" and the "reduction of capital" to be as follows:
(1) The dividends are and should be taxed as dividends and accordingly:
(a) the non-resident shareholder is not entitled to a refund of Part XIII tax;
(b) no amount was received by any of the shareholders of 24(1) on a reduction of the paid-up capital of the corporation as the amounts were received as dividends and accordingly subparagraph 53(2)(a) does not apply.
(2) The special resolution reducing the stated capital of 24(1) is not effective to recharacterize the prior "dividend" payments as not being dividends but does reduce the stated capital of 24(1) and thus the paid-up capital of its shares.
Support for our Position
The term "dividend" is not defined in the Income Tax Act or in the Canada Business Corporations Act (CBCA). The weight of judicial authority regarding, dividends supports the proposition that any payment made by a corporation to its shareholders pro rata is a dividend unless the payment is made (i) on a formal reduction of capital in compliance with all applicable corporate law procedures respecting reduction of capital or (ii) on winding-up or liquidation of the corporation, irrespective of whether the corporation can meet the solvency requirements of the corporate law.
It is the position of Revenue Canada Taxation that transactions can generally not be subsequently retroactively revised. This policy is generally supported by the courts.
There is some uncertainty as to the application of this principal to transactions that are subsequently determined to have been void or voidable and that have in fact been rescinded. There is some support for the proposition that a dividend paid contrary to the solvency requirements of the argument that dividends paid by a CBCA corporation contrary to the solvency provisions of that statute can retroactively revoked. However, we do not consider that such argument would be successful particularly in the context of the Income Tax Act having regard to the scheme of the Act which requires that tax be assessed annually and thus requires that transactions be characterized in the year in which they occur and does not generally permit the re-opening of prior years returns assessments. Furthermore, in the present case it has not been established by the taxpayer and is by no means evident that the payment of the dividend offended the CBCA. The fact that there is a deficit for financial statement purposes does not mean that the dividend was paid contrary to the CBCA as that legislation refers to the realizable value of the corporation's assets at the time the dividend was declared and paid whereas the financial statements presumable reflect book value.
For the same reasons that the dividends cannot be revoked or recharacterized the resolutions reducing the stated capital of cannot be revoked or disregarded. Accordingly we consider the paid-up capital of the shares of 24(1) as having been reduced by the special resolution.
for DirectorReorganizations and Non-Resident DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch