| 19(1) | File No. 5-8927 |
| P. Diguer | |
| (613) 957-2120 |
November 10, 1989
Dear Sirs:
Re: Subparagraph 89(1)(b)(ii) of the Income Tax Act (Canada) (the Act)
We are writing in response to your letter dated October 17, 1989 in which you requested our opinion regarding the application of the above referenced provision of the Act in the hypothetical situation outlined hereunder.
1. Corporation X wishes to pay a capital dividend to its shareholders pursuant to subsection 83(2) of the Act.
2. Partnerco, a Canadian partnership as defined in Section 102 of the Act, owns shares of Corporation X. The partners in Partnerco are all Canadian-controlled private corporations as defined in paragraph 125(7)(b) of the Act.
3. Corporation Y is a member of Partnerco and wishes to pay a capital dividend to its shareholders out of proceeds from the receipt of the capital dividend to paid by Corporation X.
In your above referenced letter you mention that in computing the capital dividend account of Corporation Y the provisions of subparagraph 89(1)(b)(ii) of the Act appear to indicate that the time of inclusion would be the date on which the capital dividend is received by Corporation Y. However, you are concerned that paragraph 96(1)(f) of the Act could have application in the transaction. This provision would, inter alia, require that the time of the inclusion would be the taxation year in which the partnership has received the taxable dividend occurs.
Our Comments
For the purpose of the Act, in determining a member's proportionate share of the income or loss of a partnership form a source or from sources in the particular place, the partnership first computes its income for a fiscal period as if it were a person resident in Canada in accordance with the provisions of is 96(1)(a) to (g) and subsection 96(2) of the Act.
Partnership income on the source basis will flow to partners, in accordance with their profit and loss sharing ratios, at the fiscal year end of the partnership pursuant to paragraph 96(1) of the Act. Accordingly, if is our view that the dividends in question received by Partnerco are not received for purposes of computing the capital dividend account of Corporation Y until the fiscal year end of the partnership pursuant to the provisions of paragraph 96(1)(f) of the Act.
The foregoing comments represent our general views with respect to the subject matter of your letter and are provided in accordance with paragraph 24 of Information Circular 70-6R.
Yours truly,
for Director Reorganizations and Non-Resident DivisionSpecialty Rulings DirectorateLegislative and IntergovernmentalAffairs Branch