2016-0670541I7 Foreign affiliate share redemption

Principal Issues: Whether some amounts received on the redemption of shares of a foreign affiliate can, in a specific fact situation, be treated as a dividend rather than proceeds of disposition.

Position: It depends whether legally there is, in part, a dividend. If not, the entire amount received is to be treated as proceeds of disposition.

Reasons: The Canadian tax treatment of proceeds received on a redemption of shares of a foreign corporation does not depend on foreign law.

Author: Gravel, Hugo
Section: 93(1)

                                                                                                                                                  April 11, 2017

                                                                                                                                                 HEADQUARTERS
Ms. Marie-Hélène Chouinard                                                                                                   Income Tax Rulings
International Tax Analyst                                                                                                          Directorate
International and Large Business Directorate                                                                          Hugo Gravel, LL.B., D.Fisc.
Canada Revenue Agency
2575 Ste-Anne Blvd, 3rd Floor
Québec, Qc  G1J 1Y5                                                                                                              2016-067054

Foreign affiliate share redemption

Dear Ms. Chouinard:

This is in reply to your correspondence dated September 13, 2016 wherein you requested our views as to whether an amount received before August 20, 2011, the date of entry into force of the modifications made to section 90 of the Income Tax Act (the “Act”), by a corporation resident in Canada (“Canco”) in consideration for the redemption of shares of one of its foreign affiliates (“FA”), would be treated as proceeds of disposition of such shares or, in part, as a dividend, in the situation you described to us.

All statutory references herein are to the Act, unless otherwise indicated.

Facts

Our understanding of the relevant facts is as follows:

1.    A corporation resident in Canada (“Canco”) owns 100% of the class XXXXXXXXXX preferred shares (the “XXXXXXXXXX Shares”) of a corporation resident in Barbados (“FA”). All the common shares of FA, which are the only other shares of FA, are held by a non-resident corporation that is not a foreign affiliate of Canco.

2.    FA is a foreign affiliate and a controlled foreign affiliate of Canco, for the purposes of the Act.

3.    FA is licensed to operate as an International Business Company under the International Business Companies Act of Barbados.

4.    On XXXXXXXXXX, FA’s articles of incorporation were amended (the “Amendment”) to provide, inter alia, that in the case of a redemption of the XXXXXXXXXX Shares :

XXXXXXXXXX

5.    On XXXXXXXXXX, FA redeemed all the XXXXXXXXXX Shares by way of a director’s resolution which contains the following:

XXXXXXXXXX

6.    Canco did not file an election pursuant to subsection 93(1) with respect to the redemption of the XXXXXXXXXX Shares.

7.    Barbados law is silent about the characterization of an amount received upon the redemption of shares of a Barbadian company, but Barbados law does not prevent a corporation from treating such amount, or a part thereof, as a dividend.

Our comments

The CRA is generally of the view that amounts received by a shareholder in respect of a redemption of shares of a foreign affiliate are to be treated as proceeds of disposition of the shares. It is also the CRA’s view that distributions received from a foreign affiliate prior to the coming-into-force of subsection 90(2) should generally be characterized as a dividend where the relevant foreign corporate law characterizes it as such. Where subsection 90(2) does apply, the foreign corporate law treatment is not relevant in determining the nature of the distribution.

Subsection 90(2) generally applies to distributions made after August 19, 2011, but it may apply earlier if a certain election has been filed. You have not provided information to us as to whether that election was filed. However, it appears to us that whether or not subsection 90(2) applies is likely to not matter as, if there is in fact a distribution that is separate from the redemption, that distribution is likely to satisfy the criteria for dividend treatment under subsection 90(2). Thus, the determination of the treatment of the proceeds received on the redemption of the XXXXXXXXXX Shares will, in our view, depend on whether legally there is, in part, a distribution of certain funds in the form of a dividend and, in another part, proceeds from a redemption of shares. If there is only, as a matter of law, a redemption and cancellation of shares, or if there is no conclusive evidence as to whether there is, in part, a dividend, we would generally view all such amounts as having been received as proceeds from the disposition of the XXXXXXXXXX Shares, and no amount as having been received as a dividend. In this event, you may want to consider whether the taxpayer may be eligible to make a late election under subsection 93(1), as is provided for in subsections 93(5) and (5.1).

If there is, in part, a dividend, we would suggest that to the extent the purpose of issuing the XXXXXXXXXX Shares is to skew exempt surplus to the Canadian shareholder, or to otherwise achieve a Canadian tax benefit, consideration be given as to the potential application of subsection 95(6) and/or subsection 245(2).

For your information, unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency’s electronic library. A severed copy will also be distributed to the commercial tax publishers, following a 90-day waiting period (unless advised otherwise), for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should the taxpayer request a copy of this memorandum, they may request a severed copy using the Privacy Act criteria, which does not remove taxpayer identity. Requests for this version should be e-mailed to: ITRACCESSG@cra-arc.gc.ca.

We trust these comments will be of assistance, and thank you for your enquiry.

Dave Beaulne, CPA, CA
Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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