5-903216
Dear Sirs:
Re: Paragraph 258(3)(b) and Subsection 258(5) of the Income Tax Act (the Act")
We are writing in response to your letter of November 8, 1990, wherein you requested our opinion on the application of paragraph 258(3)(b) and subsection 258(5) of the Act.
Our comments, which follow, are general in nature and are premised on your statement made during the January 9, 1991 telephone conversation with our A. Nelson that your November 8 letter was not in respect of a proposed or completed transaction and was only hypothetical in nature.
You asked us to consider a situation where a Canadian resident corporation (the "recipient corporation") acquires common shares in a corporation not resident in Canada (the "payor corporation") to such an extent that the recipient corporation has a substantial interest in the payor corporation within the meaning of section 191 of the Act.
The common shares acquired by the recipient corporation are issued after 8:00 p.m.. EDST, June 18, 1987 and are not term preferred shares or grandfathered shares as defined in the Act.
When the payor corporation pays a dividend on those corporation shares, the dividend will be a dividend in respect of which no deduction could be made by the recipient corporation under subsection 112(1) or (2) by reason of subsection 112(2.2) of the Act had the payor corporation been a taxable Canadian corporation.
Our General Comments
Subsection 258(5) of the Act excludes dividends received from a corporation in which the recipient had a substantial interest (the meaning, assigned by section 191 of the Act). Since the recipient corporation had a substantial interest in the payor corporation, subsection 258(5) would not apply in the above hypothetical situation to deem the dividend received by the recipient corporation from the payor corporation to be interest received in the year.
Subsection 228 of the Department of Finance's July 13, 1990 Technical Bill proposed an amendment to the coming into force provisions for subsection 258(3) of the Act, as follows:
Subsection 193(5) (which refers to the clause number in Bill C-139 that received Royal Assent on September 13, 1988 and is the coming into force provision for subsection 258(3) of the Act)... is repealed and the following substituted a therefore:
"(5)subsection (2) (the clause in Bill C-139 which refers to subsection 258(3) of the Act) is applicable with respect to dividends received.... on shares acquired after 8:00 p.m. Eastern Daylight Saving Time, June 18, 1987 that,...(b) in the case of shares described in paragraph 258(3)(b) of the said Act... are grandfathered shares... or were not issued after 8:00 p.m. Eastern Daylight Saving Time, June 18, 1987 ... or deemed by paragraph 112(2)(2.2)(f)..... to have been issued..."
This proposal was restated at section 228 of Finance's February, 1991 publication entitled "Draft Legislation to Amend the Income Tax Act and Related Statutes".
Since the shares in the above scenario are not grandfathered shares and paragraph 112(2.2)(f) does not apply, and assuming the proposed amendment is enacted, the remaining concern would be the question of when the payor corporation's shares were not issued after 8:00 p.m. EDST, then subsection 258(3) would apply and if the shares were issued after that time then subsection 258(3) would not apply.
Assuming the proposed coming into force provisions for subsections 258(3) of the Act are passed as proposed in section 228 of the July 13, 1990 Technical Bill, then paragraph 258(3)(b) of the Act would not apply in the above hypothetical scenario because the relevant shares of the payor corporation were issued after 8:00 p.m. EDST , June 18, 1987.
The foregoing expressions of opinion are not advance income tax rulings and are not binding Revenue Canada, Taxation as noted in paragraph 21 of Information Circular 70-6R2.
for DirectorFinancial Industries DivisionRulings Directorate
Principal Issues
5-903216 Allan Nelson
Overview
We were asked to provide an opinion that paragraph 258(3)(b) and subsection 258(5) of the Act would not apply in a hypothetical scenario.
A favourable opinion was issued based on the given hypothetical facts and the proposed revisions to the coming into force provisions for paragraph 258(3)(b).
Issue
Does paragraph 258(3)(b) of the Act have application with respect to dividends received on a share of the capital stock of a foreign corporation where the share was issued after June 17, 1987?
Position
If the proposed amendments to the coming into force provisions for subsection 258(3) of the Act are passed as proposed in the July 13, 1990 Technical Bill, (as reiterated in Finance's February, 1991 proposals), then paragraph 258(3)(b) would not apply where the share was issued after June 17, 1987.
21(1)(b)