P. Diguer (613) 957-2120
19(1)
January 31, 1990
Dear Sirs:
Re: Paragraph 89(1)(b) of the Income Tax Act (Canada) (the "Act")
We are writing in response to your letter dated October 24, 1989 wherein you requested our opinion regarding the application of the above referenced provision of the Act in the hypothetical situation outlined hereunder.
FACTS
1. Company A realized a capital gain of $100,000.00 in its taxation year ended December 31, 1987. Company A, a Canadian-controlled private corporation as defined in paragraph 125(7)(b) of the Act, added the non-taxable portion of the capital gain ($100,000 x 1/2) to its capital dividend account in accordance with the provisions of subparagraph 89(1)(b)(i) of the Act.
2. As a result of the transaction outlined in paragraph 1 above, Company A had a capital dividend account as defined in paragraph 89(1)(b) of the Act, of $50,000 as at December 31, 1987.
3. Company A elected and paid the $50,000 in its capital dividend account as a dividend on January 2, 1988, in accordance with the provisions of subsection 83(2) of the Act.
4. Company A realized a capital loss of $100,000 in its December 31, 1988 taxation year. It carried back $50,000 of the allowable capital losses and, in accordance with the provisions of paragraph 111(1)(b) of the Act, applied it against the 1987 taxable capital gain outlined in paragraph 1 above.
5. Company B realized a capital gain of $100,000 in its taxation year ended December 31, 1987. Company B, a Canadian-controlled private corporation as defined in paragraph 125(7)(b) of the Act added the non-taxable portion of the capital gain ($100,000 x 1/2) to its capital dividend account in accordance with the provisions of subparagraph 89(1)(b)(i) of the Act.
6. As a result of the transactions outlined in paragraph 5 above, Company B had a capital dividend account as defined in paragraph 89(1)(b) of the Act, of $50,000 as at December 31, 1987. Company B did not elect to distribute any portion of its capital dividend account in its 1988 taxation year.
7. All the issued shares of the capital stock of Company B are held by Company A.
8. On January 1, 1989 Company B was wound up into Company A in accordance with the provisions of subsection 88(1) of the Act.
In your earlier referenced letter you requested our opinion concerning the above summarized transaction as follows:
Upon the wind-up of Company B as described in paragraph 8 above, is the capital dividend account of Company B that is transferred to Company A pursuant to paragraph 87(2)(z.1) of the Act, included in the capital dividend account of Company A under subparagraph 89(l)(b)(i) or 89(1)(b)(ii) of the Act?
It is your view that the capital dividend account of Company B would not be included under 89(1)(b)(i) because this subparagraph refers to "capital gains of the corporation" which you interpret to apply to Company A and not its subsidiary.
In addition, you indicate that subparagraph 89(1)(b)(ii) of the Act, which refers to intercorporate dividends, would apply had Company B paid a capital dividend in 1988 in accordance with the provisions of subsection 83(2) of the Act.
OPINION
The provisions of paragraph 87(2)(z.1) and 88(1)(e.2) provide for the flow through on the winding-up of a subsidiary of its capital dividend account to the parent. However, it is our view that in computing the parent company's capital dividend account at any particular time after the winding-up of a subsidiary with a capital dividend account, separate calculations must be made under the provisions of paragraphs 89(1)(b) and 87(2)(z.1) of the Act. The sum total of these two calculations at any particular time after the winding up would represent the capital dividend account balance of the parent.
To illustrate, using the earlier summarized transactions, Company A's capital dividend account as at January 2, 1989 would be computed as follows:
Capital dividend account of
Company B (otherwise determined
pursuant to paragraph 89(1)(b))
immediately before the wind-up
(87(2)(z.1) and 88(1)(e.2) $50,000.00 Capital dividend account of
Company A otherwise determined,
at the particular time, pursuant
to paragraph 89(1)(b)
(Deficiency of $50,000.00) NIL
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Company A capital dividend account $50,000.00The 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,
T. Harris for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch