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Wyman W. Webb (613) 957-2109
JUN 28 1988
Dear Sirs:
Re: Section 183.1 of the Income Tax Act (the "Act")
This is in reply to your letter of March 29, 1988 in which you asked for a ruling concerning the application of section 183.1 of the Act in the hypothetical situation described below:
1. A and E are unrelated individuals who deal with each other at arm's length and who each own 50% of the issued shares of an operating company ("Opco") which is a Canadian-controlled private corporation within the meaning assigned by paragraph 125(7)(b) of the Act earning active business income eligible for the small business deduction pursuant to subsection 125(1) of the Act.
2. Due to recent disagreements regarding the company's operations, A and B have decided to terminate their financial arrangement and B will sell his shares in Opco.
3. To accomplish this, A will cause a holding company ("Holdco") to be incorporated and will transfer his shares of Opco to Holdco under the provisions of section 85 of the Act in exchange for shares of Holdco. Holdco will then purchase the shares of the operating company owned by B for $200,000 and on closing will give to B a promissory note for that amount.
4. Once Holdco owns all of the shares of Opco, it will cause Opco to pay a dividend to Holdco in the amount of $200,000 which it will use to reply the promissory note owed to B.
5. The transaction will then be completed resulting in all of the shares of Opco previously held by A and B being owned by Holdco which will in turn be 100% owned by A.
Confirmation of the consequences of specific proposed transactions will only be provided in response to a request for an advance income tax ruling. The procedures for requesting a ruling are as set out in Information Circular 70-6R and the Special Release thereto. As your request does not conform to the guidelines for advance ruling requests at set out in this Information Circular we are unable to provide any rulings on the application of any provisions of the Act to the transactions described above. We can, however, provide some general comments, as set out below.
Comments on section 183.1 of the Act
The Minister of Finance on June 13, 1988 tabled a Notice of Ways and Means Motion in the House of Commons (the "Notice") which included certain amendments to section 183.1 of the Act. Provided that section 183.1 of the Act is enacted substantially in the form appearing in the Notice", Revenue Canada, Taxation will not interpret the existing version of section 183.1 of the Act, prior to its repeal, as being applicable to transactions of the type described in the situation outlined above, as a result of these transactions in and of themselves.
Other Comments
If Holdco is resident in Canada, subsection 55(2) of the Act may apply as a result of the transactions described above. The dividend described in paragraph 4 above would necessarily reduce the capital gain that Holdco might realize on a disposition at fair market value of the shares of Opco before the dividend and the other conditions for the application of subsection 55(2) of the Act may be present. Whether subsection 55(2) of the Act would apply as a result of an actual series of transactions similar to those described above is a question that can only be answered with full knowledge of all of the related facts and transactions.
The above comments are based only on the provisions of the Act referred to above and should not be interpreted as implying that any other provision of the Act would or would not apply to or as a result of any actual transactions or events similar to those described in the hypothetical situation above.
In accordance with the practice described in paragraph 24 of Information Circular 70-6R, the foregoing comments are not binding on Revenue Canada, Taxation in respect of any taxpayer.
Yours truly,
for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and intergovernmental Affairs branch