24 August 1994 External T.I. 9414995 - SERIES OF TRANSACTIONS

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

AT WHAT POINT IN TIME DOES THE ARM'S LENGTH TEST IN PARAGRAPH 55(3)(a) APPLY IN SITUATIONS OTHER THAN A DIVORCE.

Position TAKEN:

AT ANY TIME THROUGHOUT THE SERIES OF TRANSACTIONS. THE DIVORCE SITUATION IS AN ADMINISTRATIVE CONCESSION.

Reasons FOR POSITION TAKEN:

IT IS OUR VIEW THAT THIS IS THE CORRECT INTERPRETATION OF THE LAW.

	   		941499
XXXXXXXXXX	   A. Seidel

Attention: XXXXXXXXXX

August 24, 1994

Dear Madam:

This is in reply to your letter dated May 30, 1994 requesting an interpretation of the timing of the application of paragraph 55(3)(a) of the Income Tax Act.

Unless otherwise indicated, all references to statute are to the Income Tax Act S.C. 1970-71-72, c.63, as amended, consolidated to June 10, 1993 (the "Act").

Paragraph 55(3)(a) of the Act provides that subsection 55(2) of the Act will not apply to a dividend received by a corporation unless such dividend was received as part of a transaction or event or series of transactions or events that resulted in a disposition of property to a person with whom the corporation is dealing at arm's length or there is a significant increase in the interest in any corporation of any person with whom the corporation that received the dividend was dealing at arm's length.

Since the relevant test is whether the series of transactions resulted in a disposition of property to a person dealing at arm's length with the corporation that received a dividend or a significant increase in the interest in any corporation by a person dealing at arm's length with the corporation that received a dividend, it is generally the Department's view that the arm's length test in paragraph 55(3)(a) of the Act is applicable throughout the series of transactions which includes the disposition of property or the increase in the interest of any corporation.

Revised Draft Amendments to the Act which were released by the Minister of Finance on June 23, 1994 propose to amend subparagraphs 55(3)(a)(i) and (ii) such that the "arm's length" test will become a "related" test. This amendment to subparagraphs 55(3)(a)(i) and (ii) of the Act would not alter the Department's views expressed above.

These comments are provided in accordance with the guidelines set out in paragraph 21 of Information Circular 70-6R2.

Yours truly,

for Director
Reorganizations and Foreign Division
Rulings Directorate
Policy and Legislation Branch