| 19(1) | File No. 5-9403 |
| Firoz Ahmed | |
| (613) 957-2092 |
April 18, 1990
Dear Sirs:
Re: Section 84.1 of the Income Tax Act (Canada) (the "Act")
This is in response to your letter of January 12, 1990 in which you requested our opinion as to the application of section 84.1 of the Act to the situation described herein.
Facts
1.
2.
3. 24(1)
4.
5.
6.
7. 24(1)
Opinions
Your letter appears to relate to an actual fact situation and set of proposed transactions and thus should be the subject of an advance income tax ruling. We are unable to specifically comment on the tax consequences pertaining to proposed tax consequences pertaining to proposed transactions other than in the context of an advanced income tax ruling. However, we are able to provide the following comments as to the potential application of section 84.1 of the Act to sales of shares of a corporation resident in Canada by an individual to another corporation in circumstances generally similar to those described herein.
In general terms, where an individual disposes of shares of a subject corporation, within the meaning of subsection 84.1(1), to another corporation with which the individual does not deal at arm's length for consideration comprised only of cash and debt of the other corporation and, immediately after the disposition, the subject corporation would be connected with the other corporation, paragraph 84.1(1)(b) applies to deem the individual to have received a divided equal to the amount by which the value of the non-share consideration received from the other corporation exceeds the paid-up capital of the transferred shares of the subject corporation.
Therefore, in a situation similar to the one described herein, paragraph 84.1(1)(b) would deem each transferor of shares of Opco to Purchaseco to have received a dividend if such transferor did not deal at arm's length with Purchaseco. None of the transferors described herein would appear to be related to Purchaseco and thus the determination of whether a transferor would deal at arm's length with Purchaseco would be a question of fact which could only be determined after an examination of all of the relevant circumstances.
As a general matter, we would expect that X would not deal at arm's length with Purchaseco in respect of the sale of his shares of Opco to Purchaseco. In addition there is nothing in the facts which would suggest that B would deal otherwise than at arm's length with Purchaseco. However, as we noted above both of these determinations would have to be made in the context of the actual fact situation. We are not prepared to offer any general comments as to whether a person in the situation of A would deal at arm's length with Purchaseco.
Yours truly,
for DirectorReorganizations and Non-Resident DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch