S. Leung (613) 957-2116
May 23 1989
Dear Sirs:
Re: Stock Dividend Received from a U.S. Corporation
This is in reply to your letter of March 15, 1989 in which you requested our opinion on the amount of dividend that would be included in computing income pursuant to subsection 90(1) of the Income Tax Act (Canada) (the "Act") in the following hypothetical situation:
(1) A U.S. corporation paid a stock dividend to a Canadian controlled corporation.
(2) The U.S. corporation is not a foreign affiliate of the Canadian controlled corporation. Foreign affiliate has the meaning assigned by paragraph 95(1)(d) of the Act.
(3) On the records of the U.S. corporation, $5 has been credited to the paid-up capital of each of the shares of a particular class issued as a result of the stock dividend, $20 has been credited to the contributed surplus of each of the shares of that class, and retained earnings of the U.S. corporation has been debited for $25 for each of the shares of that class.
You requested our confirmation that an amount of $5 would be considered a dividend received by the Canadian controlled corporation pursuant to subsection 90(1) of the Act.
The situation outlined in your letter appears to involve actual contemplated transactions. If this is the case, the transactions should be the subject of a request for an advance income tax ruling because assurance as to the tax consequences of contemplated transactions can only be obtained in the context of an advance income tax ruling. The procedures for making such a request are outlined in our Information Circular 70-6R, dated December 18, 1978. However, we are offering the following comments.
Pursuant to the definition of "amount" in subsection 248(1) of the Act, we agree that the amount of dividend which would be included in computing the income of the Canadian controlled corporation pursuant to subsection 90(1) of the Act is the amount of the increase in paid-up capital of the shares of the class of the capital stock of the U.S. corporation issued by reason of the payment of the stock dividend, except in a situation where any of subsections 15(1.1), 112(2.1), (2.2), (2.4), sections 187.2, 187.3, 191.1, subsections 258(3) or 258(5) of the Act applies to the stock dividend.
We would, however, like to add that on a future distribution of the contributed surplus of the class of shares to the Canadian controlled corporation, a benefit could be considered to have been conferred on the Canadian controlled corporation by the U.S. corporation. Consequently, pursuant to subsection 15(1) of the Act, the amount or value of any such benefit would be included in computing the income of the Canadian controlled corporation.
The foregoing comments represent our general view of the subject matter of your letter. They are not rulings and in accordance with the guidelines explained in Information Circular 70-6R, are not binding on the Department.
Yours truly,
for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch