| 24(1) | File No. 5-9545 |
| M.P. Sarazin | |
| (613) 957-2125 | |
| 19(1) |
June 22, 1990
Dear Sirs:
Re: Subsection 245(2) of the Income Tax Act (Canada) (the "Act")
We are writing in response to your letter dated January 24, 1990 in which you requested our views on the application of subsection 245(2) of the Act to the following hypothetical situation.
1) Aco is a Canadian-controlled private corporation within the meaning of paragraph 125(7)(b) of the Act. Aco is owned by A, a Canadian resident for purposes of the Act.
2) A no longer has any use for the corporate entity, Aco, and wishes to extract the cash (the only remaining asset in the company) from the company.
3) Bco, an arm's length party, will purchase all of the shares of Aco for the value of the cash remaining in Aco.
You would like to know whether or not subsection 245(2) of the Act would apply to redetermine the proceeds of disposition to be taxable dividends. You have compared the tax consequences associated with capital gains treatment versus dividend treatment at the $100,000 and $1,000,000 levels and your results indicate that integration exists at the $1,000,000 level and does not exist at the $100,000 level. You feel that subsection 245(2) of the Act should be applied uniformly for all situations thereby allowing the disposition to stand as a capital gain rather than a deemed dividend.
We regret that we are unable to provide you with any meaningful comments concerning the above situation since all of the relevant facts and circumstances surrounding a particular situation must be reviewed to determine the application of subsection 245(2). In as much as we do not have all the facts of the situation outlined in your letter, we regret that we are not able to express an opinion with respect to the tax consequences of the situation described therein.
We agree with your conclusion that subsection 245(2) should apply uniformly where all of the facts are identical. However, in the two scenarios presented this is not the case. Each situation must be reviewed to determine whether there exists a tax benefit within the meaning of subsection 245(1) and, if so, if there is an avoidance transaction as defined in subsection 245(3) of the Act. If the two conditions are met then subsection 245(2) will, subject to subsection 245(4), apply. Since the $1,000,000 example does not result in a tax benefit there would be no avoidance transaction and subsection 245(2) could not have application. However, since a tax benefit is realized in the $100,000 example subsection 245(2) could have application if the other conditions set out in section 245 are met.
We would like to draw your attention to the potential application of subsection 84(2) of the Act to this situation. It would be a question of fact whether or not property has been distributed to shareholders upon the winding-up discontinuance or reorganization of the corporation's business. In this regard, we refer you to the decision of the Supreme Court of Canada in Smythe et al v. M.N.R. 69 DTC 5361.
In our opinion, all of the relevant facts could only be made available to us where the situation described relates to an actual proposed transaction, in which case we would only be prepared to consider the matter if it were the subject of a request for an advance income tax ruling. The procedures for making such a request are outlined in Information Circular 70-6R, dated December 18, 1978 and the related Special Release thereto.
Yours truly,
T. Harrisfor DirectorReorganizations and Non-Resident DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch