| 5-903661 | |
| L.A. McCarron-McGuire | |
| (613) 957-2092 |
July 16, 1991
Dear Sirs:
Re: General Anti-Avoidance Rule ("GAAR") Section 245 of the Income Tax Act (the "Act")
We are writing in response to your letter, dated December 12, 1990, regarding the application of the above-noted provision of the Act to the following hypothetical situation:
1. Canco, a taxable Canadian corporation, has the following share structure:
- $1,000,000 preferred shares having a stated capital and paid-up capital of $1,000,000 and a minimum dividend entitlement, and
- 100 common shares
2. As a result of an "estate freeze", Mr. A owns the preferred shares and his children own the common shares. The adjusted cost base to Mr. A of his preferred shares is $1.00. All individuals are resident in Canada.
3. Canco has a capital dividend account, as defined in section 89 of the Act, of $500,000.
4. Mr. A would like Canco to redeem half of his preferred shares on a tax-free basis.
5. To accomplish Mr. A's wishes, it is proposed that the following series of transactions be undertaken
- The stated capital of the preferred shares will be reduced to, $1. This will effect a similar reduction in the paid-up capital of such shares. No payment will be madeto any shareholder upon such reduction in paid-up capital and therefore, subsection 84(4) will not result in a dividend being deemed to have been paid.
- Subsequent to the reduction in paid-up capital, Canco will redeem one-half of the preferred shares owned by Mr. A for their fair market value of $500,000. As a result, Canco will be deemed to have paid, and Mr. A will be deemed to have received, by virtue of subsection 84(3), a dividend of $499,999.
- Canco will make a capital dividend election pursuant to subsection 83(2) in respect of the deemed dividend.
You have asked whether the provisions of subsection 245(2) of the Act would apply to redetermine the tax consequences that would otherwise result, but for section 245. You have expressed a concern that since the preferred shares owned by Mr. A have a minimal dividend entitlement, the capital dividends rightfully belong to the children.
You have also asked whether our position would change if one of Mr. A's children were a non-resident of Canada.
Our comments
Whether it could reasonably be considered that any of the avoidance transactions which you described would not result directly or indirectly in a misuse of any provision of the Act or an abuse having regard to the provisions of the Act read as a whole, such that subsection 245(4) would apply, is a determination that could only be made after a review of all of the relevant circumstances of a particular situation. Accordingly we regret that we cannot provide any meaningful comments with respect to the application of subsection 245(2) to your situation.
Assurance as to the tax consequences of specific proposed transactions will only be given in response to a written request for an advance income tax ruling. The procedures for requesting advance income tax rulings are set out in Information Circular 70-6R2.
Yours truly,
for DirectorReorganizations and Non-resident DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch