ROUND TABLE - CGA - JANUARY 10, 1992
Officer: P Diguer
File: 7-912210
QUESTION #5
Would the provisions of subsection 55(2) of the Act apply to the following situation:
- B Ltd is a wholly-owned subsidiary of A Ltd. A Ltd owns common shares and preferred shares with low paid-up capital in B Ltd. The preferred shares were issued upon a rollover.
- A Ltd has a debt owing to a creditor which it wishes to pay.
- In order to pay its debt, A Ltd requests B Ltd to sell one of its properties to a third party in an arm's-length transaction and to redeem part of the preferred shares owned by it.
If the Department's answer is "yes", what would its opinion be if, instead of redeeming the preferred shares, B Ltd paid a taxable dividend on its common shares? Does the Department interpret the "purpose test" in subsection 55(2) of the Act less strictly than the "results test" in the case of deemed dividends?
ANSWER
It seems that subsection 55(2) of the Act may apply in either case, i.e. whether B Ltd pays a dividend directly to A Ltd or redeems the preferred shares owned by A Ltd.