| December 13, 1990 | |
| VANCOUVER DISTRICT OFFICE | Rulings Directorate |
| International Audit Section | Foreign Section |
| 197-11 | G. Kauppinen |
| (613) 957-2117 | |
| Attention: Thea M. Kreuger | |
| 7-4576 |
SUBJECT: 24(1)
This is in reply to your memorandum dated December 6, 1989 wherein you request our opinion regarding the application of subsection 20(12) in the following circumstances.
Facts
1.
2.
3. 24(1)
4.
5.
Issue
24(1)
Our Opinion
1. In order to apply the exclusion in paragraph 126(1)(a) or subsection 20(12) of the Act the redemption amount must be income under Canadian tax law from a share of capital stock of a foreign affiliate of the corporation. It is irrelevant for this purpose how the redemption amount is treated for U.S. tax purposes. It is U.S. corporate law which determines whether a distribution from a U.S. corporation to a Canadian shareholder is a return of paid-up capital, a dividend, or some others type of income for Canadian tax purposes. For instance, a distribution after June 1988 on a reduction of paid-in capital or contributed surplus (as opposed to a distribution on a reduction of paid-up capital or a redemption of shares) under U.S. corporate law would be, in our opinion, income from a share of the capital stock of a foreign affiliate pursuant to subsection 15(1).
2. Since a redemption of shares is a disposition of capital property for Canadian tax purposes any gain realized on the redemption is a capital gain and not income from a share (property). Subsection 9(3) states that "income from property" does not include any capital gain from the disposition of that property and "loss from a property" does not include any capital loss from the disposition of that property.
3. Notwithstanding the foregoing it is our opinion that for purposes of the definition of non-business tax in paragraph 126(7)(c) the meaning of the words "income or profits tax" means a tax computed under the laws of the foreign country on income or profits. In this case, the U.S. income tax law deems the distribution to be a dividend to the extent that earnings and profits exist in the corporation. (To the extent that a distribution exceeded earnings and profits, it would be deemed to be a return of capital for U.S. tax purposes). Therefore, it is our view that the withholding tax on the deemed dividend is "an income and profits tax" within the meaning of paragraph 126(1)(c).
24(1) 21(1)(b)
ChiefForeign SectionReorganizations and Non-Resident DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch