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W.W. Webb (613) 957-2109
JUN 22 1988
Dear Sirs:
Re: Section 183.1 of the Income Tax Act (Canada) (the "Act")
This is in reply to your two letters of January 11, 1988 in which you asked for our opinion concerning the application of section 183.1 of the Act in the three hypothetical situations described below:
1. Mr. A sells shares for $100,000 to Mrs. A in consideration for a promissory note bearing a fair market value interest rate. The purpose of the sale is to permit Mrs. A to acquire an interest in the company to participate in future growth of the company. Mr. A. does not intend to, nor will he call the loan, but he will bequeath it to Mrs. A at death.
2. Mr. A sells shares with a fair market value of $200,000 to a forty year old son for a promissory note of $200,000 payable at $20,000 per year for ten years. The son is active in the business and has a personal marginal tax rate as a result of salary income equal to or greater than that of his father. The company pays salaries or dividends to the son and the funds are used by the son to make the $20,000 annual payments to his father. The purposes of the sale to the son are to provide for the continuity of the family business and to provide the son with an equity interest in a company in which he is a significant employee and to which he will be the heir.
3. The shares of Opco are owned 67% by Company A, 8% by Mr. B and 25% by five other individuals. Mr. A owns all the shares of Company A; and Mr. A and Mr. B are not related and are dealing at arm's length. Mr. B sells his shares of Opco on their fair market value of $200,000 to Company A and reports a capital gain. Opco pays dividends and the funds received by Company A are used to pay Mr. B.
Confirmation of the consequences of specific proposed transactions will only be provided in response to a request for an advance income tax ruling. The procedures for requesting a ruling are as set out in Information Circular 70-6R and the Special Release thereto. We can, however, provide some general comments, as set out below.
Comments re section 183.1 of the Act
The Minister of Finance on June 13, 1988 tabled a Notice of Ways and Means Motion in the House of Commons which included certain amendments to section 183.1 of the Act. Provided that section 183.1 of the Act is enacted substantially in the form appearing in the Notice of Ways and Means Motion dated June 13, 1988, Revenue Canada, Taxation will not interpret the existing version of section 183.1 of the Act, prior to its repeal, as being applicable to transactions of the type described in the three situations outlined above, as a result of these transactions in and of themselves.
Other Comments
Situation 1
The provisions of subsections 74.1(1) and (2) and section 74.2 of the Act may apply as a result of the transfer of the shares by Mr. A to Mrs. A as described in situation 1 unless the conditions necessary to qualify for relief under section 74.5 of the Act are satisfied. The proceeds of disposition that Mr. A will be deemed by paragraph 69(1)(b) of the Act to have received upon the disposition of those shares will be an amount equal to the fair market value of those shares, if the fair market value of those shares at the time that Mr. A disposes of them is greater than the amount paid by Mrs. A therefor. If the amount paid by Mrs. A for the shares acquired from Mr. A is greater than the fair market value of these shares at the time she acquires them, she will be deemed by paragraph 69(1)(a) of the Act to have acquired such shares at that fair market value.
Situation 3
You have also asked for our comments related to the application of subsection 55(2) of the Act to the hypothetical situation 3. Based on this situation as described above we are unable to agree that subsection 55(2) of the Act would not be applicable. If Company A is resident in Canada, subsection 55(2) of the Act may apply as a result of the transactions described in situation 3. The dividend would necessarily reduce the capital gain that Company A might realize on a disposition of the Opco shares before the dividend, and the other conditions for the application of subsection 55(2) of the Act may be present. Whether subsection 55(2) of the Act would apply as a result of an actual series of transactions similar to those described in situation 3 is a question that can only be answered with full knowledge of all of the related facts and transactions.
Situations 1 - 3
The above comments are based only on the provisions of the Act referred to above and should not be interpreted as implying that any other provision of the Act would not apply to or as a result of any actual transactions or events or series of transactions or events similar to those described in the three hypothetical situations above.
In accordance with the practice described in paragraph 24 of Information. Circular 70-6R, the foregoing comments are not binding on Revenue Canada, Taxation in respect of any taxpayer.
Yours truly,
for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch