Translation disclaimer
This translation was prepared by Tax Interpretations Inc. The CRA did not issue this document in the language in which it now appears, and is not responsible for any errors in its translation that might impact a reader’s understanding of it or the position(s) taken therein. See also the general Disclaimer below.
Principal Issues: Whether, in a particular situation where an individual would sell his or her shares of a corporation to the holding company created by his nephew, section 84.1 would apply.
Position: The potential application of section 84.1 in the given situation would depend on whether or not the uncle and the holding corporation owned by his nephew would deal with each other at arm's length. Paragraph 251(1)(c) provides that, at a particular time, it is a question of fact whether unrelated persons are dealing with each other at arm's length. Such determination can only be made following the review of all facts relating to a particular situation. CCRA would generally not presume that there is a non-arm's length relationship between an uncle or aunt and his or her niece or nephew. However, family ties may be more likely to give rise to non-arm's length relationships, depending on the facts and circumstances.
Reasons: Wording of the Act and previous positions.
2003-000864
XXXXXXXXXX S. Prud'Homme
(613) 957-8975
March 26, 2003Dear Madam,
Subject: Request for a Technical Interpretation Concerning the Application of Section 84.1 of the Income Tax Act and the Concept of Arm's Length
This is in response to your letter of March 11, 2003, in which you requested our views on the application of section 84.1 of the Income Tax Act (the "Act") and the concept of not dealing at arm's length to a particular situation. Unless otherwise indicated, all references to a statutory section or included provision in this letter are to a section of the Act or one of its provisions.
It appears to us that the situation described in your letter and summarized below may be an actual situation involving taxpayers. As explained in Information Circular 70-6R5, it is not the practice of this Directorate to provide comments on proposed transactions involving specific taxpayers otherwise than in the form of an advance income tax ruling. If your situation involved specific taxpayers and one or more completed transactions, you should submit all relevant facts and documentation to the appropriate Tax Services Office for its opinion. However, we are able to offer the following general comments that may be helpful. It should be noted that the application of one or more provisions of the Act generally requires an analysis of all the facts relating to a particular situation. Accordingly, and given that your letter only briefly describes a hypothetical given situation, the comments we make below may not be fully applicable in a particular given situation.
1) Particular Situation
You have presented us with the situation described below (the "Particular Situation") as part of your request for a technical interpretation.
(a) Mr. A was married to Ms. A. Mr. B was married to Ms. B. Ms. A and Ms. B were sisters. Mr. A and Mr. B were therefore brothers-in-law. Mr. A was the father of Son A. Mr. B was therefore Son A's uncle.
(b) Mr. A and Ms. A each held 50% of the issued and outstanding common shares of the capital stock of a corporation ("Holdco A"). For the purposes hereof, we have assumed that Mr. A and Ms. A were the sole shareholders of Holdco A.
(c) Mr. B and Ms. B each held 50% of the issued and outstanding common shares of the capital stock of a corporation ("Holdco B"). For the purposes hereof, we have assumed that Mr. B and Ms. B were the sole shareholders of Holdco B.
(d) Holdco A and Holdco B each held 50% of the issued and outstanding common shares of the capital stock of a business corporation ("Opco").
Messrs. A and B each held 50% of the issued and outstanding preferred shares of the capital stock of Opco.
The preferred shares of the capital stock of Opco held by Mr. A had a fair market value of $500,000, a paid-up capital of $100 and an adjusted cost base of $500,000. The preferred shares of the capital stock of Opco held by Mr. B had the same tax attributes. We understand that those preferred shares of the capital stock of Opco were issued to Mr. A and Mr. B in transactions that allowed them to "crystallize" their capital gains deduction (subsection 110.6(2.1)). Among other things, those transactions resulted in a high adjusted cost base to Mr. A and Mr. B for the preferred shares.
We have assumed that Mr. A, Holdco A, Mr. B and Holdco B were then the only shareholders of Opco.
(e) Mr. A, Ms. A, Mr. B and Ms. B wished to retire and dispose of the interest they then held, directly or indirectly, in Opco.
(f) As a result, Holdco A disposed of all of the common shares in the capital stock of Opco held by it to a corporation all of whose issued and outstanding shares were held by a third party unrelated to Messrs. A and B and Ms. A and B (such corporation and such unrelated person referred to as "Portfolioco C" and "Mr. C", respectively) for a price equal to the fair market value of such common shares.
Mr. A disposed to Portfolioco C of all of the preferred shares of the capital stock of Opco that he held for a price equal to the fair market value of such preferred shares, namely $500,000.
Holdco B disposed of all of the common shares of the capital stock of Opco that it held for a price corresponding to the fair market value of such common shares, to a corporation whose shares were held entirely by Son A ("Portfolioco A").
Finally, Mr. B disposed to Portfolioco A all of the preferred shares of the capital stock of Opco that he held for a price equal to the fair market value of such preferred shares, namely $500,000.
We understand that immediately after the above arrangements, the only shareholders of Opco were Portfolioco C and Portfolioco A. We also understand that immediately after the disposition of the preferred shares of the capital stock of Opco by Mr. B to Portfolioco A, Opco was connected to Portfolioco A (within the meaning of subsection 186(4)). Finally, we understand that Mr. B and Opco were resident in Canada at all relevant times.
2) Your Question regarding the Particular Situation
You wish to know whether the Canada Customs and Revenue Agency (the "CCRA") considers that section 84.1 would apply in the Particular Situation with respect to the disposition by Mr. B to Portfolioco A of the preferred shares of the capital stock of Opco held by Mr. B to cause a dividend of $499,500 ($500,000 of non-share consideration - $500 of paid-up capital in respect of the preferred shares) to be deemed to have been paid by Portfolioco A to Mr. B and received by him. Based on the above facts of the Particular Situation, you wish the CCRA to assure you that section 84.1 does not apply in respect of Mr. B's disposition of the preferred shares of Opco's capital stock to Portfolioco A.
3) Your Comments on the Particular Situation
You are of the view that Mr. B and his nephew, Son A, were not related to each other pursuant to subsection 251(2) and therefore would not be deemed not to deal with each other at arm's length pursuant to paragraph 251(1)(a).
You are also of the opinion that section 84.1 should not apply in the Particular Situation with respect to the disposition by Mr. B to Portfolioco A of the preferred shares of the capital stock of Opco held by Mr. B, except to the extent that it is established that Portfolioco A and Mr. B were not dealing at arm's length.
Furthermore, you referred us to an advance ruling issued by the CCRA on June 25, 1996 and bearing the number E 9617493. According to you, this document deals with a situation whose facts are similar to those relating to the Particular Situation. In this advance ruling, it was stated that a particular person (the "Vendor") disposes of shares in a particular corporation to another corporation (the "Purchaser"), all of whose issued and outstanding shares are held by the person's "step-niece". In your view, the CCRA took the position in this document that if the Vendor and his "step-niece" were dealing with each other at arm's length, section 84.1 was not applicable to the transaction.
4) Our Comments on the Particular Situation
We would first like to point out that in document E 9617493 to which you refer, this Directorate had indeed issued an advance ruling to the effect that the provisions of subsection 84.1(1) would not apply to the disposition by the Vendor to the Purchaser of shares of the capital stock of the particular corporation. This advance ruling was, however, conditional on the Vendor and the Purchaser dealing with each other at arm's length. In addition, it was noted as a commentary at the end of the document that the advance rulings issued should not be construed as confirmation that the Directorate was of the view that the Vendor and the Purchaser were dealing at arm's length with each other, or that this issue had been considered. The commentary also stated that to the extent that it was determined that the Vendor and the Purchaser were not at arm's length with each other, the advance rulings issued would not be valid.
Furthermore, we are of the view that, in the Particular Situation, Mr. B and his nephew, Son A, are not related persons pursuant to paragraph 251(2)(a) and subsection 251(6), unless that nephew is the child of the Vendor under the extended definition of "child" in subsection 252(1). As a result, Portfolioco A and Mr. B were not related to each other pursuant to subsection 251(2) and therefore would not be deemed not to deal with each other at arm's length pursuant to paragraph 251(1)(a).
However, pursuant to paragraph 251(1)(c), it is a question of fact whether unrelated persons are dealing with each other at arm's length at a particular time. Thus, unrelated persons may or may not be dealing at arm's length, depending on the facts and circumstances of a particular situation. In this regard, each transaction or series of transactions must be considered individually. With respect to the Particular Situation, it is impossible for us to determine whether Portfolioco A and Mr. B were not dealing at arm's length with each other since such a determination would require an analysis of all the facts and circumstances surrounding a particular given situation and your letter only briefly describes a hypothetical given situation. However, we refer you to paragraphs 15 to 19 of Interpretation Bulletin IT-419R, Meaning of Arm's Length, dated August 24, 1995, which set out the general guidelines followed by the CCRA in determining whether or not persons are dealing with each other at arm's length at a particular time. Paragraph 16 of Interpretation Bulletin IT-419R states, among other things, that the courts have applied the following criteria to determine whether a transaction has occurred between persons dealing at arm's length:
- was there a common mind which directs the bargaining for both parties to a transaction;
- were the parties to a transaction acting in concert without separate interests; and
- was there "de facto" control.
Furthermore, the CCRA does not generally presume that there is an arm's length relationship between the parties in transactions involving uncles and nephews. As noted above, the question of whether two persons are not dealing with each other at arm's length requires an analysis of all the facts and circumstances surrounding a particular situation. However, we are of the view that family ties may be more likely to give rise to the existence of a non-arm's length relationship between particular persons.
Please note that this opinion is not an advance ruling and, as stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, it is not binding on the CCRA in respect of any particular factual situation.
We hope that our comments will be helpful to you.
Maurice Bisson, CGA
for the Director
Corporate Reorganizations and Resource Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2003
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2003
Email this Content