ROUND TABLE - CGA - JANUARY 10, 1992
Officer: M P Sarazin
File: 7-912207
QUESTION #2
For the purposes of subsection 55(2) of the Act, two brothers are deemed to be dealing at arm's length and not to be related under the presumption in paragraph 55(5)(e) of the Act. Consider a situation where a corporation (A Ltd) is owned equally by two brothers who wish to transfer their respective shares to two personal corporations so as to include their children. We can assume that there is a significant increase in the interest of the children in each of the management corporations. Since no child is related to his uncle's corporation, if dividends are paid by A Ltd to the personal corporations as part of this series of transactions, would the Department decide to apply subsection 55(2) of the Act even if the purpose of these transactions is to set up a "freeze" between the fathers and their children? If, in the Department's opinion, the conditions of the exception in subparagraph 55(3)(a)(ii) of the Act were not met, would the dividends paid as part of this series of transactions then be excluded pursuant to the "purpose test" in subsection 55(2) of the Act?
ANSWER
The tax consequences of the transactions described above must be determined in light of all the relevant facts. For example, when it is possible to determine that one of the purposes of a dividend received by a corporation (except a deemed dividend under subsection 84(3) of the Act) is not to significantly reduce the capital gain that would have resulted from the disposition of a share, then subsection 55(2) of the Act will not apply to the dividend. If the dividend received is a deemed dividend under subsection 84(3) of the Act, subsection 55(2) of the Act will apply if the result of the series of transactions is the reduction of the capital gain.
Only after studying all the facts and circumstances of a series of transactions or events can the Department determine whether one of the purposes of a dividend (except a deemed dividend under subsection 84(3) of the Act) is to effect a significant reduction in the capital gain. Under subsection 248(10) of the Act, a series of transactions or events shall be deemed to include any related transactions or events completed in contemplation of the series.