22 June 2011 Internal T.I. 2011-0409301I7 - Shareholder Benefit

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Does Parent's sale of the shares of Canco to another non-resident subsidiary of Parent, for proceeds in excess of the FMV of such shares, give rise to a 214(3)(a) deemed dividend.

Position: Question of fact.

Reasons: Not if there is no appropriation of any of Canco's funds and Canco has not been "impoverished" by the sale of its shares.

									June 22, 2011

Robert Thomson 							HEADQUARTERS
Pacific Region International Tax Advisor			A. Seidel, CMA
International Advisory Services				(613) 957-2058
International & Large Business Directorate
Burnaby-Fraser Tax Services Office

									2011-040930

Shareholder Benefit

We are writing with regard to the application of subsection 15(1) and paragraph 214(3)(a) of the Income Tax Act (the "Act") to the facts described below.

Background

1. Parent is a corporation resident in the United States ("U.S.").

2. Holdco is a corporation resident in a European country. Parent owns all of the issued and outstanding shares of Holdco.

3. Canco is a taxable Canadian corporation. Parent owns all of the issued and outstanding shares of Canco. The shares of Canco are treaty-protected property as defined in subsection 248(1) of the Act.

4. Parent disposes of the shares of Canco to Holdco for cash consideration. The CRA has determined that the proceeds of disposition that Holdco paid to Parent for the shares of Canco is in excess of the fair market value of such shares.

Issue

Does the amount paid by Holdco to Parent that is in excess of the fair market value of the shares of Canco give rise to a shareholder's benefit to Parent that is taxable under paragraph 214(3)(a) of the Act?

Our Comments

In general terms and subject to certain exceptions, subsection 15(1) of the Act requires that the amount or value of a benefit conferred on a shareholder, or a person in contemplation of becoming a shareholder, by a corporation in a taxation year is to be included in the shareholder's income for the year.

As stated in paragraph 1 of Interpretation Bulletin IT-432 "Benefits Conferred on Shareholders" ("IT-432R2"), the word "benefit" in subsection 15(1) is broad enough to include:

(a) a payment by a corporation to a shareholder otherwise than pursuant to a bona fide business transaction;

(b) an appropriation of a corporation's funds or other property in any manner whatever to, or for the benefit of, a shareholder; or

(c) any other benefit or advantage conferred on a shareholder by a corporation.

As discussed in paragraph 5 of IT-432R2, where a transaction involving a corporation and a shareholder is a bona fide business transaction, there is no subsection 15(1) benefit to the shareholder. Normally, a transaction is considered to be bona fide when its terms and conditions are essentially the same as they would be if the transaction were entered into by parties dealing at arm's length.

In response to question 7 of the 2007 conference of the Association de planification fiscale et financière (APFF) round table on taxation of financial strategies and instruments, the following comments were made:

"Subsection 15(1) of the Act applies where a corporation is impoverished due to a transaction and one of its shareholders, or a person in contemplation of the person becoming a shareholder, derives a benefit. If these conditions are met, subsection 15(1) will apply such that the shareholder, or the person in contemplation of the person becoming a shareholder who derives such a benefit, will be required to include in computing his income the value of the benefit thereby conferred."

In the situation described above, Holdco, not Canco, has conferred a benefit on Parent. This sale does not include a payment from Canco to either of Parent or Holdco, there is no appropriation of any of Canco's funds by either of Parent or Holdco and Canco has not been "impoverished" by the sale of its shares. Although Parent has received a shareholder benefit from Holdco to which paragraph 214(3)(a) of the Act could arguably apply, it is our view that it would be difficult to convince a court that paragraph 214(3)(a) should apply to deem a dividend to have been paid to Parent by a hypothetical corporation resident in Canada in a situation where no Canadian person and no corporation in which a Canadian resident has an ownership interest has been impoverished.

There could also be difficult issues with respect to Canada's tax treaties with the European country and the US. Both those countries could see a Canadian assessment as double taxation, and Canada is neither the source state of the income nor the residence state of the recipient.

Additional Comment

Pursuant to paragraph 69(1)(a) of the Act, Holdco will be deemed to have acquired the shares of Canco at their fair market value. As a result thereof, for purposes of the Act, Holdco's adjusted cost base of the shares of Canco will be equal to their fair market value at the time they were acquired by Holdco.

Yours truly,

for Director
International & Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch