| 19(1) | File No. 5-9293 |
| S. Leung | |
| (613) 957-2116 |
March 19, 1990
Dear Sirs:
Re: Paragraph 55(3)(a) of the Income Tax Act (the "Act")
We are writing in response to your letter of December 11, 1989 wherein you requested a technical interpretation with respect to the application of paragraph 55(3)(a) of the Act to the following hypothetical situation which was outlined in your letter.
Situation
1. X Co. is owned equally by Mr. and Mrs. X.
2. Mr. and Mrs. X are currently involved in divorce proceedings, and, as part of the divorce settlement, it has been agreed that the assets of X Co. be distributed equally to Mr. and Mrs. X.
3. It is contemplated that Mrs. X will transfer her shareholdings in X Co. to her holding company, Y Co., pursuant to subsection 85(1) of the Act.
4. X Co. will then transfer to Y Co. assets representing 50% of the fair market value of X Co. for shares of Y Co. pursuant to subsection 85(1) of the Act.
5. The shareholdings between X Co. and Y Co. will then be eliminated through the redemption of shares.
6. All of the above transactions will be completed prior to the divorce being finalized.
Comments
The situation outlined in your letter appears to involve actual contemplated transactions. Assurance as to the tax consequences of contemplated transactions can only be obtained in the context of an advance income tax ruling. The procedures for requesting an advance income tax ruling are outlined in Information Circular 70-6R dated December 18, 1978 issued by Revenue Canada, Taxation and the related Special Release thereto. Nevertheless, we can offer the following general comments.
It is assumed that the transactions described in Step 5 above will result in each of X Co. and Y Co. being deemed to have paid and received a deemed dividend pursuant to subsection 84(3) of the Act.
We note that in the situation outlined in your letter Mr. and Mrs. X are related to each other until such time as their divorce proceedings are finalized. We also note that X Co. and Y Co. will be related to each other and Mrs. X will be related to X Co. both at the time the property of X Co. is transferred to Y Co. and at the time the dividends will be deemed to have been paid pursuant to subsection 84(3) of the Act by each of X Co. and Y Co. Nevertheless, it is our view that the deemed dividends will be received by X Co. and Y Co. as part of the series of transactions or events that includes the divorce of Mr. and Mrs. X. As a result of the divorce Mr. and Mrs. X will no longer be related to each other and it will be a question of fact whether they will be dealing with each other at arm's length at a particular time. If they will deal with each other at arm's length, it is our view that the deemed dividends will be received by X Co. and Y Co. as part of a series of transactions or events that results in
(i) a disposition of any property to Y Co. with whom X Co. will be dealing at arm's length, or
(ii) a significant increase in the interest in Y Co. of Mrs. X with whom X Co. will be dealing at arm's length, with the result that the exception found in paragraph 55(3)(a) will not apply to the dividends to be received by each of X Co. and Y Co.
We trust the above will be of assistance.
Your truly,
for DirectorReorganizations and Non-Resident DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch