10 January 1992 Income Tax Severed Letter 912221 - Average Annual Rate of Return

ROUND TABLE - CGA - JANUARY 10, 1992

                                 Officer: Charles Thériault
                                          File: 7-912221

QUESTION #16

Subsection 110.6(9) of the Act explains the meaning of "average annual rate of return" by referring to the return that a knowledgeable investor would expect to receive on his/her investment. What is the Department's position when shares purchased for a minimal amount are transferred to a holding company pursuant to the provisions of subsection 85(1) when their market value is high? Is the dividend to be calculated on the value of the shares when they are transferred or the consideration received when they were issued?

ANSWER

The annual rate of return by way of dividends that a knowledgeable and prudent investor who purchased the shares would expect to receive on the day he/she acquired them is a question of fact. The expectations of a knowledgeable and prudent investor must be determined by assuming that there will be no delay or postponement in the payment of dividends and no failure to pay dividends, that the dividends will be paid each year at a predetermined rate, either fixed or variable and that the share will be eventually sold for an amount equal to that received by the corporation when the share was issued. We are of the opinion that the return on transferred shares is also a factor to be taken into account in determining the annual rate of return and that the average annual return is usually calculated on the basis of the amount invested by a knowledgeable and prudent investor who purchased the share on the day it was issued.

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