| 24(1) | 901623 |
| L.A. McCarron-McGuire | |
| (613) 957-2092 | |
| Attention: 19(1) | EACC9277 |
August 23, 1990
Dear Sirs:
Re: Request for Technical Interpretation Subsection 15(1.1) of the Income Tax Act (the "Act")
We are responding to your letter dated July 16, 1990 in which you requested our views on the application of subsection 15(1.1) of the Act in the following hypothetical situation:
1. The shareholders of a corporation ("OPCO"), who are individuals, wish to "purify" OPCO so as to ensure that their shares of OPCO are "qualifying small business corporation shares" within the meaning assigned by subsection 110.6(1) of the Act.
2. OPCO issues a stock dividend consisting of preferred shares that have a high redemption price (equal to the fair market value of OPCO's non-qualifying assets) and nominal paid-up capital.
3. The shareholders transfer their stock dividend shares of OPCO to a new corporation ("HOLDCO") on a tax-deferred basis pursuant to subsection 85(1) of the Act.
4. OPCO then redeems the stock dividend shares at their stated redemption price, which price is paid by the transfer of OPCO's non-qualifying assets to HOLDCO.
Our comments:
Subsection 15(1.1)
Subsection 15(1.1) of the Act applies to the payment of a stock dividend where one of the purposes of the payment is to significantly alter the value of the interest of any specified shareholder of the corporation.
It is our view that subsection 15(1.1) of the Act 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.
Other issues
In the situation outlined above, if HOLDCO deals at arm's length with OPCO, or if any shareholder of OPCO who acquires an interest in HOLDCO deals or is deemed to deal at arm's length with HOLDCO, the deemed dividend arising on the redemption of the stock dividend shares will be subject to the application of subsection 55(2) of the Act as the exemption in paragraph 55(3)(a) of the Act will not be applicable.
In addition, even if the purification transactions do not, in and by themselves, include or result in a disposition of property to, or a significant increase in the interest in any corporation of, a person with whom HOLDCO deals at arm's length, it is a question of fact whether they will form part of a larger series of transactions, determined with reference to subsection 248(10) of the Act, that includes a disposition of property to any person who deals at arm's length with HOLDCO. It is our view that a preliminary transaction will form part of the series of transactions that includes the subsequent transactions if, at the time the preliminary transaction is carried out, the taxpayer has the intention to implement the subsequent transactions and the subsequent transactions are eventually carried out, even though at the time of completion of the preliminary transactions the taxpayer either had not determined all of the important elements of the subsequent transactions such as, for example, the identity of other taxpayers involved, or lacked the ability to implement the subsequent transactions. If the purification transactions and an ultimate sale to an arm's length person form part of the same series, the dividend arising on the redemption of the stock dividend shares will not qualify for the exemption in paragraph 55(3)(a) of the Act.
The foregoing expressions of opinion are given in accordance with the practice referred to in paragraph 24 of Information Circular 70-6R dated December 18, 1978 and are not binding on Revenue Canada, Taxation.
Yours truly,
for DirectorReorganizations and Non-resident DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch