MEMORANDUM
JUN 13 1986
Legislative Affairs and Publications Directorate C.D. McDonald, Director General
Attention: M.A. Hiltz, Director Current Amendments and Regulations Division
From: Specialty Rulings Directorate J.C. Clark 957-2114
RE: Subsection 55(2) of the Imcome Tax Act (the "Act")
XXXX
The Rulings Directorate and Specialty Rulings Directorate Review Committee considered the attached submission on June 10, 1986. The issue involved is whether a subsection 84(3) deemed dividend should be subject to subsection 55(2), when it arises as a part of a series of transactions that includes a disposition of property to a person with whom the dividend recipient deals at arm's length.
The relevant facts of the case under consideration, the reasons that a favourable ruling was originally given and the opposing Corporate Reorganizations Section position are set out in the attached copy of Leasing and Financing Section's submission to the Review Committee. We have also attached a copy of the original ruling.
Our comments with respect to the list of reasons for giving the original favourable ruling as set out in the attached submission are as follows:
i) The fact that there was fair market value realization within a corporate group does not exempt a subsection 84(3) dividend which is otherwise caught by subsection 55(2). We do not have consolidated corporate returns in Canada.
ii) The avoidance addressed by subsection 55(2) has nothing to do with whether or not a strip has occurred. The avoidance addressed is the receipt of proceeds of disposition in the form of tax free intercorporate dividends. XXXX has received a dividend under subsection 84(3) the result of which was to effect a reduction in the gain on the XXXX shares. The dividend was received as part of a series of transactions which resulted in an arm's length disposition of property. None of the specific exemptions in subsection 55(3) apply. XXXX has received its proceeds in the form of a tax free dividend.
iii) The fact that the Department is sympathetic to loss utilization within corporate groups does not mean that we have a basis for ignoring the law in order to permit such utilization.
iv)The intention of the holder of the redeemable preference shares is not a condition for the application of the results tests in subsection 55(2).
Our questions to you are:
1) Is the application of subsection 55(2) of the Act appropriate from a tax policy viewpoint in the situation described in the attached memorandum?
2) Based on your previous responsibilities in this branch, can you confirm our recollection that in cases involving the sale of assets it has been the continuing interpretation of the Corporate Reorganizations Section that the results test in subsection 55(2) was specific and that there was therefore no basis for granting favourable rulings when the conditions of the results test were satisfied?
Director General Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch
c.c. Brian Darling Norman Angell