| December 20, 1990 | |
| Ed Gauthier | Rulings Directorate |
| Director | Financial Industries Division |
| Special Audits Division | N. Goldstein |
| 952-9853 | |
| Attention: Stan Trevor | |
| 7-902590 |
SUBJECT: 24(1)
This is in reply to your memorandum dated September 26, 1990 concerning a referral to you from the Winnipeg District Office and the above noted taxpayer. All references herein to statute are references to the Income Tax Act unless stated otherwise.
The following is a summary of the facts as we understand them:
24(1)
24(1)
Issue A:
As was noted by the District Office, the Department of National Revenue (DNR) has found it difficult to provide guidelines as to what constitutes "acquired in the ordinary course of the business". The DNR has made two public comments on the issue:
(a) 1980 Conference Report: Q.23
"... shares issued on the incorporation of a wholly-owned subsidiary would not as a rule be in the ordinary course of business".
(b) 1984 Conference Report: Q.62
"Factors which have been considered in establishing whether particular shares were or were not acquired in the ordinary course of business are at follows;
1) the nature of the holder's activities,
2) the number and frequency of such share acquisitions by the holder,
3) whether the funds involved represent the initial capitalization of a new subsidiary or the provision of additional operating capital to a subsidiary both of which would indicate permanent capitalization,
4) ...
5) ..."
It appears that such guidelines invoke two traditional approaches to resolving the question of whether a transaction is in the ordinary course of the 24(1) business. First, the notion that with certain types of companies such as life insurers or banks, any business is in the ordinary course of business seems to be rejected by considering the nature of the holder's business and the frequency of the transactions, etc. Rulings have been issued indicating that a financial institution can acquire shares of a wholly-owned subsidiary in other than the ordinary course of its business (see: i.e. ATR-10 (July 31, 1986)).
Secondly, the Courts have tended to use similar factors to determine if an asset is acquired in the ordinary course of the business as are used to determine if an asset is acquired on account of income or capital.
The jurisprudence in recent years has supported these guidelines. Where the phrase is "in the ordinary course of the business", (as opposed to "the ordinary course of business") it is necessary to determine the business(es) of the recipient (BC Telephone Co. v. M.N.R.), [1986] CTC 2410). To determine if a transaction is in the ordinary course of the business, the Courts tend to look at whether the transaction was extraordinary in terms of the usual operations of the corporation, whether the authority, accounting, etc. of the corporation to proceed with the transaction was done using standard procedures or whether special procedures were followed (i.e. approval by the corporate C.E.O.) and whether the transaction(s) was an integral part of the taxpayer's business. (See i.e. E.V. Keith Enterprises Ltd., 76 DTC 6018 (FC-TD)).
24(1)
vi) Subsection 138(6) permits the deduction for dividends on term preferred shares that are acquired in other than the ordinary course of the business. This requires a factual determination as to how the shares were acquired. In contrast subsection 138(9) includes in income the gross investment revenue from property held or used in the course of carrying on an insurance business in Canada independent of the manner in which such assets ore acquired. Consequently, it is possible to determine that, factually, shares are not acquired in the ordinary course of business, yet those same shares are in fact used or held in the course of business of carrying on an insurance business.
21(1)(b) 24(1)
24(1) 21(1)(b)
21(1)(b)
for DirectorFinancial Industries DivisionRulings Directorate