| 19(1) | File No. 5-9166 |
| S. Leung | |
| (613) 957-2116 |
December 18, 1989
Dear Sirs:
Re: Paragraph 69(1)(b) and subsection 84(3) of the Income Tax Act (the "Act")
We are writing in response to your letter of November 24, 1989 wherein you requested our opinion as to whether paragraph 69(1)(b) of the Act would apply to the following situation which was outlined in your letter.
Situation
24(1)
Our Comments
It is the Department's view that paragraph 69(1)(b) of the Act will apply to a disposition of shares of a corporation which are disposed of in a manner as described in subsection 84(9) of the Act, if
(i) the shareholder who disposes of the shares is not dealing at arm's length with the corporation, and
(ii) the proceeds of disposition of the shares (i.e. the redemption price) is less than their fair market value at the time of their disposition,
notwithstanding that subsection 84(3) of the Act might also apply to the acquisition of its own shares by the corporation. thus, if the fair market value of the shares at the time of their redemption exceeds their redemption price, subparagraph 69(1)(b)(i) of the Act operates to deem the taxpayer to receive proceeds equal to the fair market value.
In our view, the application of subparagraph 69(1)(b)(i) of the Act does not affect the application of subsection 84(3). Subsection 84(3) applies to the actual proceeds by virtue of the cords .. the amount paid by the corporation on the redemption ..." and not to proceeds deemed to have been received under subparagraph 69(1)(b)(i). Thus to the extent that the actual amount paid on the redemption exceeds the paid-up capital of the shares, subsection 84(3) deems the shareholder to have received a dividend of an amount equal to that excess. This deemed dividend would then be deducted from the deemed proceeds as computed under subparagraph 69(1)(b)(i) of the Act by virtue of subparagraph 54(h)(x) of the Act, thereby reducing any gain computed under subsection 40(1) of the Act on the redemption.
Also, other provisions of the Act may apply as a result of the disposition of the shares as described in your letter. For example, subsection 110.6(7) of the Act may apply, depending on the facts of a particular situation, to deny a capital gains deduction claimed by a shareholder who is an individual in respect of the capital gain realized as a result of the application of paragraph 69(1)(b) of the Act because the corporation could be considered to have acquired its own shares for consideration that is significantly less than their fair market value at the time of acquisition, notwithstanding that the shareholder is deemed by paragraph 69(1)(b) to have disposed of his shares for proceeds of disposition equal to their fair market value.
We trust the above comments will be of assistance.
Yours truly,
for DirectorReorganizations and Non-Resident DivisionSpecialty Rulings DirectorateLegislative and IntergovernmentalAffairs Branch