5 September 1989 Income Tax Severed Letter AC74032 - Paid-up Capital of a Canadian Holding Company

International Audits Division      Specialty Rulings Directorate
                                   H.K Tilak
Mr. J.A. Calderwood                957-2122
Director
Attention:  H.A. Braeuel

                                   7-4032

Subject: 19(1)

We are writing in response to your memorandum dated June 20, 1989 asking us to review a draft letter (a copy of which is attached hereto) responding to a letter dated May 23, 1989 from 19(1). We have reviewed the draft letter and have only two comments.

First, we suggest that you replace the words "no tax consequences" in the second line of the fourth paragraph of the draft letter with the words "generally no tax consequences".

Second, we suggest that you consider adding the following paragraph as the final paragraph of your letter:

          "For the purpose of the ITA, paid-up capital has the
          meaning assigned by paragraph 89(1)(c) of the ITA. 
          Generally, the paid-up capital of the Canadian holding
          company will, for these purposes, be equal to its
          capital under the relevant corporate laws, in this
          case, the corporate laws of the Province of British
          Columbia.  However, depending upon the particular
          circumstances, the paid-up capital may be less than the
          capital under the relevant corporate laws.  For
          example, where shares of the Canadian holding company
          were issued to the German corporation as consideration
          for transfer to the Canadian holding company of shares
          of the second tier Canadian company and the capital of
          the shares of the Canadian holding company so issued
          exceeded the paid-up capital of the shares of the
          second tier Canadian company, the paid-up capital of
          the shares of the Canadian holding company so issued
          would be equal to the paid-up capital of the shares of
          the second tier Canadian company. Or, for example,
          where shares of the Canadian holding company were
          issued to the German corporation as consideration for
          the transfer to the Canadian holding company of other
          property (having a tax cost that was less than the fair
          market value of the property) without recognizing, on
          such transfer, any gain on such property for Canadian
          tax purposes and the capital of the shares of the
          Canadian holding company so issued exceeded the tax
          cost of the property the paid-up capital of the shares
          of the Canadian holding company so issued would be
          equal to the tax cost of the property.  Paid-up capital
          would also not include any accumulated profits or
          retained earnings of the Canadian holding company that
          have not been added to its capital under the corporate
          laws of the Province of British Columbia."

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