Dear Sirs
Re: Subsection 15(1.1) and Subparagraph 55(3)(a)(ii) of the Income Tax Act (the "Act")
Further to our letter of July 10, 1990 (file 901268) and your letter of July 17, 1990, we are writing in response to your request for our comments on the interpretation of the phrase "significant increase in the interest" and the phrase "significantly alter the value of the interest" as they are used in the provisions of subparagraph 55(3)(a)(ii) and subsection 15(1.1) of the Act, respectively. You noted in your letter of July 17, 1990 that you could not reconcile our interpretation of these phrases.
The Department's interpretation of the phrase "significant Increase in the interest" as used in subparagraph 55(3) (a) (ii) of the Act is stated in John R. Robertson's paper "Capital Gains Strips: A Revenue Canada Perspective on the Provisions of Section 55" presented to the 1981 Canadian Tax Foundation Conference. It is stated on page 93 that "an increase in the interest in any corporation can either be a dollar increase in the value of one's investment or an increase in one's equity as a percentage".
In determining whether the payment of a stock dividend has significantly altered the value of a specified shareholder's interest in a corporation for purposes of subsection 15(1.1) of the Act, it is the Department's view that such change should also be measured either as a dollar change in the value of the interest or as a change in the specified shareholder's interest as a percentage.
As indicated in our letter of July 10, 1990, "(i) it is our view that subsection 15(1.1) would ordinarily not apply unless the payment of the stock dividend itself would result in an increase or decrease in the value of a specified shareholder's interest in the payor. Such an increase or decrease would not result if the stock dividend were paid to all shareholders of the payor pro rata in proportion to their shareholdings."
Applying this interpretation to the hypothetical situation outlined in our previous letter, it is our view that the payment of the stock dividend, in and by itself, does not result in any change to the interests of either Mr. or Mrs. A. As a result of the payment of the stock dividend each of Mr. and Mrs. A will continue to hold a 50% interest in Opco and the value of their interests (as represented by both the common shares and the Special Shares) has not changed.
We trust our comments will be of assistance.
Yours truly,
for DirectorReorganizations and Non-Resident DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch