10 December 1996 External T.I. 9634245 - DEEMED DIVIDEND - FOREIGN CURRENCY DENOMINATED SHARES

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:

For purposes of Part VI.1 tax - when shares denominated in a foreign currency are redeemed at their foreign currency issue amount, would the dividend caused by currency fluctuation be considered to be an excluded dividend for purposes of 191(4) and (5) ?

Position:

Only the amount up to the original issue amount would be considered to be excluded - any further amount due to currency fluctuation would not be excluded by virtue of 191(5).

Reasons:

"amount" is to be determined by reference to Canadian dollars at the time of the transaction.

			963424
XXXXXXXXXX				J.P. Dunn

Attention: XXXXXXXXXX

December 10, 1996

Dear Sirs:

Re: Deemed Dividends upon Redemption of Foreign Currency Denominated Shares

We are writing in response to your correspondence of October 15, 1996 wherein you had requested the views of the Department regarding the redemption of shares denominated in a foreign currency and, in particular, the effect of such a redemption upon any Part VI.1 tax payable by the corporation.

As the situation described in your letter relates to a completed transaction, we are unable to comment directly on that situation as the review of such transactions falls within the purview of the responsible Tax Services Office. We are, however, prepared to provide you with the following general comments.

In a situation in which shares are denominated in a foreign currency, the Department considers that the "paid-up capital", within the meaning of that term in subsection 89(1) of the Income Tax Act (the "Act"), of the shares is the Canadian dollar equivalent of the foreign currency amount for which the shares were issued at the time of issue. Similarly, the "amount paid", as that term is used in subsection 84(3) of the Act, upon the redemption of the shares will be the Canadian dollar equivalent of the foreign currency at the time of redemption. Consequently, in the situation in which the shares are redeemed at the same foreign currency amount for which they were issued, a dividend will be deemed to have been paid by the corporation pursuant to subsection 84(3) of the Act upon the share redemption to the extent that the foreign currency has appreciated relative to the Canadian dollar since the date of issue.

Assuming that the shares were "taxable preferred shares", within the meaning of that term in subsection 248(1) of the Act, paragraph 191(4)(d) of the Act provides that a deemed dividend arising on the redemption of the shares will be an "excluded dividend" for the purpose of determining the corporation's liability for Part VI.1 tax to the extent that the "specified amount", as that term is relevant in subsection 191(4) of the Act, does not exceed the fair market value of the consideration for which the share was issued. In the above noted situation, it is the view of the Department that the "specified amount" at the time the share was issued would be equal to the Canadian dollar equivalent of the foreign currency for which the share was issued and, consequently, the amount of the dividend deemed to have been paid will be an excluded dividend for the purpose of Part VI.1 of the Act to the extent that the amount paid, when measured in the then current Canadian equivalent currency, upon the redemption does not exceed the specified amount.

Subsection 191(5) of the Act, however, provides that the application of subsection 191(4) is limited to the amount "specified" in that provision. Accordingly, as the amount paid upon redemption in the present situation is greater than that specified amount because of the appreciated foreign currency, the dividend deemed to have been paid upon the redemption in excess of the specified amount will not be considered to be an excluded dividend for the purposes of Part VI.1 tax by virtue of subsection 191(5) of the Act.

We trust that this is the information which you require.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch