Dear Sirs:
Re: Subsection 245(2) of the Income Tax Act (Canada) (the "Act")
We are writing in response to your letter dated November 2, 1989 wherein you requested our opinion regarding the application of subsection 245(2) of the Act to the following hypothetical situation.
Facts
1. Mr. A owns 12.5% of the common shares of X Co, a Canadian-controlled private corporation as defined in paragraph 125(7)(b) of the Act.
2. Mr. A is the sole shareholder of Holdco, a Canadian-controlled private corporation as defined in paragraph 125(7)(b) of the Act.
3. Holdco owns 7.5% of the common shares of X Co.
4. Mr. A transfers his shares of X Co to Holdco pursuant to subsection 85(1) of the Act, electing at his adjusted cost base.
5. A dividend is declared by X Co shortly after the transfer of shares by Mr. A to Holdco as described in paragraph 4 above.
6. No Part IV tax payable by Holdco on the receipt of the dividend described in paragraph 5 above, since it is connected with X Co and X Co receives no dividend refund.
In reviewing the above summarized transactions you are concerned that the provisions of subsection 245(2) of the Act may apply and thereby deny the Part IV tax exemption for Holdco.
Our Comments
Our opinion is based on the assumption that the transfer by Mr. A of his shares in X Co to Holdco is undertaken primarily for the purpose of avoiding Part IV tax which otherwise be payable by Holdco on dividends received from X Co.
In light of the above, the transfer by Mr. A of his shares in X Co and subsequent dividend payments to Holdco would be avoidance transactions within the meaning of subsection 245(2) would be applied.
In formulating our reply as outlined above, consideration was not given to other provisions of the Act, such as section 84.1, which may apply in a specific situation involving the disposition of shares.
The foregoing comments represent our general views with respect to the subject matter of your letter. The facts of a particular situation may lead to a different conclusion. The foregoing opinions are not rulings and, in accordance with the guidelines set out in Information Circular 70-6R dated December 18, 1978, are not binding on the Department.
Yours truly, for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch