| File: | 921135 |
| Author: | Simon Leung |
April 28, 1992
PRAIRIE TAX CONFERENCE
DRAFT/EBAUCHE
May 19 & 20, 1992
Question 21
Xco, which is owned 100% by Mr. X, owns both business assets and investment assets. In order to "purify" Xco so that it meets the definition of a "small business corporation" under subsection 248(1) of the Income Tax Act (the "Act"), Xco transfers all its investment assets to a sister corporation ("Investmentco") in a series of transactions which includes the receipt of a deemed dividend under subsection 84(3) of the Act by Xco.
Immediately after this series of transactions (and contemplated at the time the investment assets were transferred to Investmentco), the shares of Xco are frozen into preference shares. New voting common shares of Xco are issued to a family trust of Mr. X (the "Trust"). The beneficiaries of the Trust are Mrs. X and their children. The trustees are Mr. X, his lawyer, and a business associate of Mr. X. The lawyer and the business associate deal at arm's length with Mr. X and a majority of the trustees are required to make any decision for the Trust. Would the exception in paragraph 55(3)(a) of the Act apply to this series of transactions so that subsection 55(2) of the Act will not apply to the deemed dividend realized by Xco? Would the answer be different if Mr. X had to be a part of the majority in making any decision for the Trust?
Department's Position
As long as each of the beneficiaries of the Trust does not deal at arm's length with Xco, it is our view that, by virtue of paragraph 55(3)(a) of the Act, subsection 55(2) of the Act would not apply to the deemed dividend realized by Xco, notwithstanding that a majority of the trustees of the Trust may deal at arm's length with Xco.
Our response only addresses the question of whether subsection 55(2) of the Act would or would not apply. It should not be construed that other provisions of the Act would have no application.