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: How would subsection 84(3) of the Act apply where common shares of a corporation are immediately purchased for cancellation, and the corporation owes a balance of purchase price.
Position: The amount of the dividend arising at the time of the purchase would equal the value of any type of consideration given for the shares, including an undertaking or promise to pay, less the paid-up capital in respect of the shares redeemed.
Reasons: Wording of the Act and previous positions.
2005-014589
XXXXXXXXXX S. Prud'Homme
(613) 957-8975
October 28, 2005
Dear Sir,
Subject: Request for Technical Interpretation - Application of Subsection 84(3) on a Balance of Sale Share Redemption
This is in response to your request received on August 8, 2005, which was originally addressed to Ms. Mireille Wilson of the Income Tax Technical Interpretation Service, Montreal Tax Services Office. Ms. Wilson has asked us to follow up on your request for interpretation. In this request, you are seeking the opinion of the Canada Revenue Agency ("CRA") regarding the application of subsection 84(3) (the "Act") in a particular situation involving a purchase for cancellation of shares with a balance of sale.
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. However, we are able to offer the following general comments that may be of assistance. 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. As a result, and given that your letter only briefly describes a hypothetical situation, the comments we provide below may not be fully applicable in a particular 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) In the year 2000, a corporation resident in Canada ("Canco") issued 100 common shares to a particular person (the "Shareholder") for $100.
(b) The shares of the capital stock of Canco had a fair market value of $100,000 on January 1, 2005.
(c) On January 1, 2005, Canco purchased for cancellation the 100 common shares of its capital stock held by the Shareholder. In consideration therefor, Canco agreed to pay an amount of $25,000 on January 1 of each of the years 2006, 2007, 2008 and 2009.
We understand that, as a matter of law, the 100 shares of the capital stock of Canco were cancelled on January 1, 2005 and that, on that date, the Shareholder had a debt obligation to Canco in the amount of $100,000. We also understand that the transaction described above is not subject to subsection 84(6).
2) Your Question regarding the Particular Situation
You wish to know the CRA's position on the application of subsection 84(3) in the context of the Particular Situation.
The CRA's position is that the amount of the deemed dividend at the time of the purchase for cancellation of the shares of the capital stock of Canco on January 1, 2005 would be equal to the value of any consideration given by Canco and received by the Shareholder for the Shareholder’s shares of the capital stock of Canco at the time of the purchase for cancellation of such shares, including any covenants or promises to pay amounts in the future, that would be in excess of the paid-up capital in respect of such shares.
This position is consistent with Cabezuelo v. M.N.R., 83 DTC 679 (T.C.C.) and Belair v. M.N.R., 89 DTC 429 (T.C.C.). We also refer you to question 45 of the 1984 Canadian Tax Foundation Roundtable (page 818 of the Congress Report), as well as to question 2 of the 1986 Q.P.F.S. (now APFF) Roundtable (pages 622 and 623 of the Conference Report). Finally, we would point out that the term “somme” [in the French, or “amount” in the English version,] used in paragraph 84(3)(a) is defined in subsection 248(1) as having the same meaning as “montant” ["amount" in English]. The term "amount" is defined very broadly in subsection 248(1) to mean "money, rights or things expressed in terms of the amount of money or the value in terms of money of the right or thing,”.
We hope that our comments are of assistance.
Best regards,
Stéphane Prud'Homme, Notary, M. Fisc.
For the Director
Corporate Reorganizations and Resource Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch
c.c. Mireille Wilson
Tax Technical Interpretation Service
Montreal Tax Services
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