IAD-HAB
19(1)
June 15, 1989
19(1)
Thank you for your letter of May 22, 1989, in which you enquire about the treatment of the following transaction under the Canadian Income Tax Act (ITA).
24(1)
It is expected that the active Canadian company will make dividend distributions to the Canadian holding company. Further, it is envisaged that the Canadian holding company, instead of making profit distributions to the German parent, will reduce its capital commensurate with the dividend receipts from the second tier Canadian corporation.
Based on the above we wish to provide you with the following opinion. There are no tax consequences in connection with the payment of the dividend by the second tier Canadian company or its receipt by the Canadian holding company. Reductions of paid-up capital otherwise than by way of a redemption, acquisition or cancellation of any class of shares of a company's Capital stock are governed by ss 84(4) of the ITA which reads as follows:
"Where at any time after March 31, 1977 a corporation resident in Canada has reduced the paid-up capital in respect of any class of shares of its capital stock otherwise than by way of a redemption, acquisition or cancellation of any shares of that class or transaction described in subsection (2) or (4.1),
a) the corporation shall be deemed to have paid at the
time a dividend on shares of that class equal to the
amount, if any, by which the amount paid by it on the
reduction of the paid-up capital in respect of that
class of shares of the corporation has been so reduced,
and b) a dividend shall be deemed to have been received at
that time by each person who held any of the issued
shares at that time equal to that proportion of the
amount of the excess referred to on paragraph (a) that
the number of the shares of that class held by him
immediately before that time is of the number of the
issued shares of that class outstanding immediately
before that time."Thus, no further tax consequences arise where the dividend paid to the German parent company is equal to the amount by which the paid-up capital of the Canadian holding company is being reduced.
On the other hand, where the payment exceeds the amount of the reduction such excess would constitute a deemed dividend subject to withholding tax under ss 212(2) of the ITA at a rate determined in accordance with Article 10 of the Canada-Germany Income Tax Agreement (1981).
We trust that the foregoing has been of assistance to you.
Yours sincerely,
J.A. Calderwood Director International Audits Division