| June 22, 1989 | |
| Toronto District Office | Specialty Rulings |
| G.A. Troy, Chief of Audit | Directorate |
| Walter M. Soler | M. Vallée |
| Business Audit 143-5-4 | (613) 957-2093 |
| File No. 7-3787 |
Subject: 24(1) Subsection 84(1) of the Income Tax Act ("the Act")
This is in reply to your memorandum dated March 23, 1989, whereby you request our opinion concerning the possible application of subsection 84(1) of the Act to a case involving share exchange transactions.
Facts
You advised us that the facts of the case are as follows:
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6. 24(1)
7. 24(1)
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Opinion
You requested our opinion as to whether a dividend may have been deemed by subsection 84(1) of the Act, to have been paid by the corporation and received by the shareholders, since the audited financial statements of 24(1) show an increase in the stated value of the Class A, Class P and Class C shares which do not result from a transaction described in paragraph 84(1)(b) of the Act.
The paid-up capital described in clause 89(1)(c)(ii)(C) of the Act refers to a paid-up capital "computed without reference to the provisions of this Act". The relevant corporate documents, rather than the financial statements of the corporation, determine the paid-up capital of the corporation for purposes of clause 89(1)(c)(ii)(c) of the Act. As mentioned in paragraph 3 of IT-463, "Paid-up Capital and Paid-up capital Limit", the legal paid-up capital of shares in most cases will be the amount indicated by a corporation's financial statements as the component of its capital stock represented by that class of shares.
In case of discrepancy between the corporate records and the financial statements, however, the amount of stated capital indicated by the corporate records and documents, as referred to in paragraph 5 of IT-463, would determine the paid-up capital computed without reference to the Act for the purposes of the definition of paid-up capital of a class of shares in clause 89(1)(c)(ii)(c) of the Act. Note that paragraph 21 of IT-463 establishes that paragraphs 3 to 5 thereof are relevant for periods after March 31, 1977.
We are of the opinion that, subject to the adjustments referred to in clause 89(1)(c)(ii)(c) of the Act, the aggregate paid-up capital of the class of shares referred to as the Class A, Class P and the Class CC shares would in each case be the stated capital thereof as established by the resolution of the Executive Committee of 24(1) dated March 31, 1987. Consequently, assuming none of the adjustments referred to in clause 89(1)(c)(ii)(c) of the Act is relevant, it is our opinion that no dividend would have been deemed to have been paid and received by virtue of subsection 84(1) of the Act as a result of the events described herein.
Other Matters
It was not stated in the facts submitted whether the deduction of the amount of the note receivable referred to in paragraph 3, and the inclusion in income of the amount recovered, referred to in paragraph 5, were each reported for tax purposes in the same manner as they were reported for accounting purposes. We have assumed you are satisfied with the tax reporting of these items.
Chief Corporate Reorganizations I SectionReorganizations and Non-Resident DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch