XXXX V.A. Sider (613) 995-1173
September 9, 1982
XXXX
We are writing in response to your letter of August 23 wherein you requested our opinion in the following situation.
Mr. X. a non resident of Canada, owns all the shares of a Canadian private corporation. He would like to effect an estate freeze. The freeze may be affected by using either Section 86 or subsection 85(1) of the Income Tax Act. In either case, Mr.. X will exchange the shares presently held by him for shares with a low paid-up capital and a redemptlon value reflecting the fair market value of the present shares. The children of Mr. X will be issued new common shares for a nominal amount. The Section 212.1 rules will not be violated.
If Mr. X dies while holding the "Hi-Lo" shares, he is deemed to realize a capital gain since the shares are taxable Canadian property. However, if the shares are redeemed shortly after Mr. X's death, the estate realizes a capital loss and deemed dividends, subject to with- holding tax if the estate is a non-resident of Canada.
You have indicated that subsection 164(6) of the Act may be used to recover some or all of the tax and the capital gains paid by the deceased. This could be the case to the extant of the capital losses realized by the estate in the following year.
You have asked whether the Department would apply subsection 55(2) of the Act on the basis that the capital gain in the event of death has bow converted into a dividend.
Subsection 55(2) Is concerned with the conversion of capital gains into tax-free intercorporate dividends. In this case, since the dividend is not received by a corporation, subsection 55(2) Is not applicable. The fact that subsection 55(2) is only concerned with dividends received by a corporation resident in Canada is also an indication that we are not concerned with time conversion of capital gains into dividends which would be subject to withholding tax.
We trust these comments will be of assistance to you.
Yours truly,
R.D. WEIL
for Director General Corporate Rulings Directorate Legislation Branch