| March 22, 1990 | |
| TO - TORONTO DISTRICT OFFICE | FROM - Specialty Rulings |
| Audit Review Section | Directorate |
| Business Enquiries | Foreign Section |
| Group 148 2-1 | G. Middleton |
| 957-2129 | |
| Attention: G. Cappella | |
| File No. 7-4440 |
SUBJECT: 24(1)
This is in reply to your memorandum of October 16, 1989 in which you asked for our views about how 24(1) common shares received by Canadian residents in the situation described below should be treated for Canadian tax purposes.
SITUATION
24(1)
Subsection 90(1) and paragraph 12(1)(k) of the Act require that a shareholder who is a Canadian resident include in computing the amount of a dividend received from a non-resident corporation.
24(1)
Pursuant to subsection 52(2) of the Act, a Canadian resident shareholder of 24(1) who receives 24(1) common shares as a dividend-in-kind shall be deemed to have acquired these shares at a cost equal to their fair market value at the time of the dividend. The adjusted cost base of the shares of would not change as a result of this transaction.
We are aware of the argument that the economic position of a Canadian resident has not changed when such a resident receives a dividend-in-kind from a U.S. corporation in this type of situation. However, Canadian income tax law does not provide for an income tax deferral when this happens.
Please find attached a copy of a memo dated February 23, 1990 to the Competent Authority Section of the International Audit Division. This memo sets out our view with respect to the application of paragraph 8 of Article XIII of the Canada-U.S. Tax Convention 1980 to the type of transactions described above. This memo also points out that, generally, for Canadian resident shareholders who are not citizens of the U.S. there is no potential for double taxation and that there may be relief from double taxation of Canadian resident shareholders who are U.S. citizens if they apply to the U.S. tax authorities for such relief.
We trust this will be of assistance to you.
K.H.M. Section ChiefForeign SectionReorganizations and Non-Resident DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch