3 November 1989 Income Tax Severed Letter AC58690 - Corporate Reorganization - Treatment of Dividends Received

5-8690
                                                  Jake E. Harms
                                                  (613) 957-2109

Dear Sirs:

Re: Paragraph 55(3)(a)

This is in reply to your letter of September 14, 1989 in which you requested our views on the ambit of paragraph 55(3)(a) of the Income Tax Act (the "Act").

Paragraph 55(3)(a) limits the application of subsection 55(2) to a dividend received by a corporation "as part of a transaction or event or a series of transactions or events that resulted in" any of the events described in subparagraphs 55(3)(a)(i) and (ii) of the Act (a "55(3)(a) Event"). Your question is whether a series of transactions or events including the dividend could ever be said to "result in" a 55(3)(a) Event if the 55(3)(a) Event is not part of the series of transactions. You cite an example in which a U.S. company with a Canadian subsidiary ("Subco I") causes one of the business segments of Subco I to be transferred to a new Canadian subsidiary ("Subco II") in order to restructure the Canadian operations along identifiable business reporting lines. At the time of the reorganization a dividend received in the course of the reorganization is, by reason of paragraph 55(3) (a), not subject to the application of subsection 55(.2). Subsequently the shares of Subco II are sold to an arm's length third party. The gain on the subsequent sale is exempt from Canadian tax by virtue of Article XIII of the Canada-U.S. Income Tax Convention (1980). Assuming that the subsequent sale was not part of the series of transactions than included the dividend and that the buyer would never have offered to purchase the shares of Subco I or the underlying business and assets now owned and operated by Subco II, you question whether we would view the subsequent sale as having resulted from the series of transactions.

In our opinion the fact that the subsequent sale would not have occurred if the restructuring of Subco I had not taken place does not, by itself, establish a sufficient causal connectIon between the sale and the restructuring to allow it to be said that the restructuring "resulted in" the sale.

One of the Dictionary meanings of the verb "result" is "to proceed or arise as a consequence, effect or conclusion". "Consequence" is defined as "something produced by a cause or necessarily following from a set of conditions." Applying these definitIons to your example, it could not reasonably be said that the subsequent sale was caused by, or necessarIly followed from, the restructuring.

In our view, In order for a series of transactions or events to be considered to have resulted in a 55(3)(a) Event, the 55(3) (a) Event would have to be either (I) an event that is part of the series of transactions or events, or (ii) a necessary outcome of the series.

Whether a particular event is part of a series of transactions or events is a question of fact that cannot be determined without a review of all the relevant facts and circumstances. A series of transactions or events is deemed by subsection 248(10) to Include any related transaction or event completed in contemplation of the series.

It is our view that a preliminary transaction will form part of a series of transactions or events determined with reference to subsection 248(10) of the Act if, at the time that the preliminary transaction is carried out, the taxpayer is intending to implement the subsequent transactions constituting the series, and the subsequent transactions are eventually carried out. Thus the preliminary and subsequent transactions will be part of a series even though at the time of completing the preliminary transaction the taxpayer either had not determined all the important elements of the subsequent transactions - such as, for instance, the identity of other taxpayers involved - or lacked the ability to implement the subsequent transactions. If, in the example cited, one of the purposes for the restructuring was to make the business division of Subco I that was transferred to Subco II saleable to potential buyers, we would likely consider the restructuring and the ultimate sale to form part of the same series of transactions or events.

The foregoing comments are provided in accordance with the practice referred to in paragraph 24 of Information Circular 70-6R dated December 18, 1978 and are not binding on the Department.

Yours truly,

for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch