5-920360
M. Séguin
24(1) (613) 957-8953
19(1)
June 3, 1992
Dear 19(1),
This is in reply to your letter of January 20, 1992 wherein you ask for our opinion regarding the application of subsection 55(2) of the Income Tax Act (the "Act"). You have subsequently provided additional information by telephone.
24(1)
You requested our opinion as to whether Revenue Canada would apply subsection 55(2) of the Act to similar circumstances and, if so, whether the provisions would apply only to the holding corporation of B or to both holding corporations.
Commentary
Subsection 55(2) of the Act could apply in that kind of situation to the holding corporation of B since the exception provided for in subsection 55(3) of the act would not apply.
The holding corporation of B would receive a taxable dividend in respect of which it is entitled to a deduction under 112(1) of the Act as part of a transaction or event or a series of transactions or events, one of the results of which (since the dividend arises pursuant to subsection 84(3) of the Act) was to effect a significant reduction in the portion of the capital gain that, but for the dividend, would have been realized on a disposition at fair market value of any share of capital stock immediately before the dividend. The event presented in subparagraph 55(3)(a)(i) of the Act is present, thus preventing the exception in subsection 55(3) of the Act from applying. In fact, the dividend received by the holding corporation of B would be part of a transaction or event that resulted in a disposition of any property (the redemption of shares) to a person (the corporation) with whom that corporation (holding of B) was dealing at arm's length.
However, as far as the holding corporation of A is concerned, paragraph 55(3)(a) of the Act would apply since it is related to the corporation (being controlled by A and A being part of a related group controlling the corporation). Consequently subsection 55(2) of the Act would not apply to the dividend received on that redemption.
The views expressed herein do not constitute an advance income tax ruling and, as stated in paragraph 21 of Information Circular 70-6R2, are not binding on the department.
Yours truly,
for the DirectorReorganizations and foreign DivisionRuling Directorate