7 September 1990 Income Tax Severed Letter ACC9733 - Intercorporate Dividends on Corporate Reorganization

24(1)

                                901891
                                J. Teixeira
                                (613) 957-2119

19(1)

SEP 7 1990

Dear Sirs:

We are writing in response to our telephone conversation, 19(1)/Teixeira, on August 15, 1990 regarding the application of subsection 55(2) to the situation described below.

1.        Mr. A and Mr. B are brothers and are Canadian residents.

2.        Each owns 50% of the issued shares of a Canadian        
          Corporation "Holdco" which in turn owns 100% of the
          issued shares of "Opco".

3.        The assets of Opco consist of 2 rental properties, a    
          building and land used in a business, and other assets.

4.        A and B would like to remove the real estate from Opco to 
          protect it from the risks of the business.

A reorganization is proposed as follows:

-         Two new companies will be incorporated and will be owned 
          50/50 by A and B.

-         Opco will sell the rental properties to Newco I and the 
          building and land used in the business to Newco II      
          pursuant to subsection 85(1) of the Act. The
          consideration will consist of preferred shares.

-         A and B will transfer shares of Holdco to Newco I and   
          Newco II, which represent the proportion of the fair    
          market value of Opco that the fair market value of the  
          real properties is of all the fair market value of      
          properties of Opco. Elections will be filed pursuant to 
          subsection 85(1) of the Act.

-         Newco I and Newco II will redeem the shares issued to   
          Opco.

-         Opco will utilize the funds received from Newco I and   
          Newco II to pay a dividend to Holdco.

It is your opinion that 55(2) of the Act will not apply to the proposed reorganization because of the exemption found in subparagraph 55(3)(a)(i) of the Act; the dispositions of property by Opco to Newco I and Newco II will be dispositions to non-arm's length persons. This would be the case notwithstanding the fact that paragraph 55(5)(e) of the Act deems brothers, for the purposes of subsection 55(2), to be unrelated and deal at arm's length, because Opco and Newco I and II will be at non-arm's length by virtue of being controlled directly or indirectly by the same group of persons. The fact that such persons are not related and are dealing at arm's length for purposes of subsection 55(2) is immaterial in making this determination. Opinion

The provisions of subsection 55(2) of the Act will apply to the dividends resulting from the above transactions because there is an increase in the interest of A and B in Newco I and Newco II and for purposes of subsection 55(2) of the Act, A and B deal at arm's length with the corporations that receive the dividends.

Yours truly,

for Director Reorganizations and Non-Resident Division Rulings Directorate Legislative and Intergovernmental Affairs Branch