1 - The Law Society of Saskatchewan
Transcription
1 - The Law Society of Saskatchewan
TABLE OF CONTENTS PAGE I. II. INTRODUCTION 1 A. RESIDENCE 1 B. TAXATION YEAR 3 C. INSTALMENTS AND FILING REQUIREMENTS 4 D. TAX RATES 5 E. COMPUTATION OF INCOME 6 SPECIAL RULES FOR PRIVATE CORPORATIONS 8 A. DEFINITIONS 8 B. CANADIAN CONTROLLED PRIVATE CORPORATIONS 1. Small Business Deduction 2. Associated Corporations 3. Part II Tax 10 10 11 15 C. INVESTMENT INCOME 18 D. DIVIDEND INCOME 21 1. Part IV Tax 21 2. Part II Tax 25 E. ABILITY TO PAY DIVIDENDS AND LIFE INSURANCE CAPITAL DIVIDENDS 25 III. TAXATION OF CORPORATE DISTRIBUTIONS A. INTRODUCTION 27 B. TAXATION OF DIVIDENDS IN THE. SHAREHOLDERS' HAND 28 C. DEEMED DIVIDENDS 30 D. SHAREHOLDER BENEFITS AND APPROPRIATIONS 33 E. LOANS TO SHAREHOLDERS 36 '.. -....' PAGE IV. HOLDING COMPANIES 39 V. SHOULD ONE INCORPORATE? 41 ) - 2 - TAXATION OF CORPORATIONS AND CORPORATE DISTRIBUTIONS I. INTRODUCTION A taxpayer may carryon a business through various forms of organizations, including a sole proprietorship, a partnership, a corporation, or a trust. This paper deals with certain aspects of the taxation of corporations and the manner in which earnings of a corporation may flow out to the shareholders. A. RESIDENCE There are several determine who is taxable. cr~teria that could be adopted to In Canada, the primary criterion for income tax purposes is residence. Subsection 2( 1) provides that income tax shall be paid upon the taxable income for each taxation year of every person res ident in Canada at any time of the year. The word "person" includes both an individual and a corporation. The term "resident" is not defined in the Income Tax Act. With respect to corporations, the basic principle is that a corporation resides where its central management and control is situated: DeBeers Consolidated Mines Ltd. v. Howe, [1906] A.C. 455 (H.L.). In determining where central management and control is situated, Canadian courts look primarily at ~ jure control. directors meet? Where do the In Victoria Insurance· Ltd. v. M.N.R., [1977] C.T.C. 2443, 77 D.T.C. 320 the taxpayer company was incorporated in the Bahamas company. as a wholly owned subsidiary of a Canadian The Bahamas company entered into standard form contracts with the Canadian company and with a number of other insurance companies. if it fell The acceptance of any particular risk t wi thin the terms and condi tions of the contracts, was purely an administrative act. The directors there was· little for them to do.• met in the Bahamas, though They were presented annually with draft contracts negotiated by a director of the Canadian company and which they approved without alterations. The Bahamian company was held not to be resident in Canada, because de jure control was exercised in the Bahamas and there was "no evidence" to show that the control de facto was exercised by the owners of the Appellant company." With respect to both individuals and corporations the Income Tax Act provides an extended meaning of common law meaning. incorporated "residence" beyond the Subsection 250(4) provides that a corporation in Canada after April 26, 1965, is deemed to be resident in Canada if it was resident or carried on business in Canada during any taxation Furthermore, year ending after April 26, paragraph 250(4)(b) contains special rules 1965. for the residence of a foreign business corporation. In the case of a non-resident t subsection 2(3) provides for taxation of income from employment in Canada, carrying on business in Canada, or from the disposition of taxable Canadian property. - 2 - B. TAXATION YEAR ) Section 2 provides that income tax shall be paid upon taxable income for each "taxation year" of a person who is subject to tax in Canada. The taxation year of a corpo.ration is defined in subsection 249(1) to mean a fiscal period while the taxation year of an individual is a calendar year. Where a person is a member of a partnership he will take income taxation year his taxation year of share the of income into of partnership which taxation year: paragraph 96(1)(f). the for partnership ends in the a given for the partner's Thus, if a corporation with an April 30 year end is a member of a partnership with a June 30 year end the corporation will take into its income for its fiscal year ending April 30, 1986 income from the partnership earned from July 1, 1984, to June 30, 1985. A fiscal period must not exceed fifty-three weeks in the case of a corporation, nor twelve months in the case of any other taxapayer: subsection 248(1). A taxpayer in business may not make a change in his fiscal period without the approval of Revenue Canada. policy in giving such approval is Bulletin IT-179. - 3 - outlined The Department's in' Interpretation C. INSTALMENTS AND FILING REQUIREMENTS Section estimated tax 157 provides in twelve that equal a corporation monthly must pay instalments. its Monthly instalments must be calculated on one of the following bases: 1. One-twelfth of its estimated tax for the currertt taxation year, with the balance, if any, payable within two months controlled (three private months in corporations the case where of all Canadiart of their income and all of the income of corporations associated with them will fall withirt the small business deduction limits) after the year end; 2. One-twelfth of its "first instalment base" for the year, as defined in subsection 157(4) and Regulation 5301(1) (essentially its tax payable for the immediately preceding taxation year); or 3. For each of the first two months of the year, one-twelfth of its second instalment base (essentially its tax payable for the second preceding taxation year), and for each of "the next ten months, one-tenth of the excess of the first two-twelfths already paid. - 4 - instalment base over the Any balance after the end of of unpaid tax is payable within three mnths the taxation year in the case of a Canadian controlled private corporation all the income of which, and all the income of corporations associated with it of which, is within the small business deduction limits for the year. All other corporations must pay any balance of unpaid tax within two months after the end of the taxation year. Althou~h final payment of taxes is due at the end of the second or third month following the end of the taxation year the final return is not due until the end of the sixth month following the taxation year: paragraph 150(l)(b) • D. TAX RATES The general rate of tax for corporations is 46%: 123. section There is, however, a reduction to 36% under section 124 to make room for provincial taxation. Corporations are subject to income tax in a province if they have a permanent establishment in the province. Where there is a permanent establishment in more than one province one must look to a formula in Part IV of the Income Tax permanent Regulations which establishments but takes also into labour account costs. not only the Saskatchewan levies tax on corporations at a basic rate of 16%, reduced to 10% for the portion of the corporation's income which is eligible for the 21% small business deduction under subsection 125( 1). The rate is further reduced to 0% for manufacturing and processing profits otherwise eligible for the 21% small business deduction. - 5 - E. COMPUTATION OF INCOME Income of a corporation for a taxation year is computed in much the same way as the income of an individual, with certain qualifications including the following: (a) The corporation is not entitled to a deduction for items which by their very nature apply only to individuals, such as child care expenses, alimony, and medical expenses. (b) Corporations in the business of leasing, developing or sellin~ real property are not limited by Re~ulation 1100(11) in the amount of capital cost allowance which they can claim on rental properties. (c) With certain exceptions a corporation excludes from its tax base dividends received from a taxable Canadian corporation, or from a corporation resident in Canada and controlled by it: a special dividends section 112. refundable received tax by a There is, however, on certain intercorporate private corporation under section 186 and a 12 1/2% tax on certain dividends paid by a corporation under section 181. - 6 - (d) Corporations are limited in their loss carry-overs if control of the company has cannot be carried forward: both control and chan~ed and the the changed [capital losses subsection 111(4)] or if nature business of the in which business the have losses were incurred is not carried on with a reasonable expect ion of profit forward: (e) [non-capital be carried subsection 111(5)]. Corporations, $2,000 losses. cannot of unlike individuals, allowable capital cannot loss set against up to ordinary income. (f) Dividends received received by an by a corporation, individual, are not unlike subject those to the section 82 gross-up and the section 121 dividend tax credit. (g) Only corporations are entitled to the section 125.1 tax credit in respect of. manufacturing and processing profits. (h) There are special rules for t.axation of business income received by Canadian controlled private corporations and for investment and dividend income received by all private corporations. - 7 - For all taxpayers, taxation year is subsection 9( 1). it is the income from property or business for a profit from those sources for the year: The Act does not define the term "profit", but generally accepted to mean the gross revenue from the business or property minus the current expenses incurred to earn such income as determined in accordance with generally accepted accounting principles. There· are some exceptions to the use of generally accepted accounting principles in determining income, since the Income Tax Act specifies certain amounts which must be included in income (see, for example, section 12) and certain deductions which are prohibited (see section 18). II. SPECIAL RULES FOR PRIVATE CORPORATIONS A. DEFINITIONS A "private corporation" is defined in paragraph 89(1)(f) as a corporation resident in Canada which is not a public corporation and which is not controlled by one or more public corporations. The active business income of a private corporation is taxed at the 52% corporate rate in Saskatchewan, unless the corporation is entitled to a small (income from property capital gains) corporations, other is business and inves tment than initially deduction. dividends taxed - 8 - at Its income, from the 52% passive income including taxable taxable Canadian corporate rate; however, 16 2/3% is refunded to the company on the basis of $1.00 for every $4.00 shareholders: of taxable dividends subsection 129( 1). which it pays to its It should be noted that the untaxed 1/2 of a capital gain falls into a private corporation's "capital dividend account" and may be distributed tax free to its shareholders: subsection 83(2). Portfolio dividends received by a private corporation are, with some exceptions, subject to a 25% refundable tax, refundable to the company when dividends "are paid in the passive same fashion as described Personal income. above with respect service business to other income (the incorporated employee situation) is taxed at 52% without benefit of any refunds or small business deduction. A "public corporation" is defined in paragraph 89( 1) (g) as a corporation resident in Canada whose shares are listed on a prescribed stock exchange in Canada or a corporation resident in Canada which has elected to be a public corporation. A public corporation is taxed at the 52% corporate rate (Saskatchewan) on both active and passive income with one exception. No tax is payable, as a general rule, on dividends received from "taxable Canadian corporations": section 112. A "Canadian controlled private" corporation" is defined in paragraph 125(7) (b) as a private corporation that is a Canadian corporation (that is, a corporation that was either incorporated - 9 - in Canada or resident in Canada from June 18, 1971 to date) and that is not controlled in any manner whatever by one or more non-resident persons or· public corporations thereof. A Canadian controlled or any combination private corporation (CCPC) receives special treatment with respect to its active business income. B. CANADIAN CONTROLLED PRIVATE 'CORPORATIONS 1. Small Business Deduction Subsection 125(1) gives a CCPC a deduction from tax otherwise payable equal to 21% of the least of three amounts: (a) the corporation's net income from active businesses in Canada (i.e. income minus losses) (partnership income of the corporation will be ignored for the purposes of this discussion); (b) the corporation's taxable income minus the aggregate of ten-fourths of the foreign tax credit with regard to property income and two times the foreign tax credi t with regard to business income; and (c) the corporation's business limit for the year (defined by subsection 125(2) as $200,000 unless the corporation - 10 - is· associated with other Canadian controlled private corporations which share the business limit); Beginning with its 1985 taxation year a Canadian controlled private corporation can claim the small business regardless of the cumulative amount of its earnings. large corporations respect to their have first thus once $200,000 again per become year of deduction Some fairly eligible active with business income. Also beginning with the 1985 taxation year the concept of "non-qualifying professional certain business" (which corporations, certain service enterprises companies) became eligible was previously management elimated once again and for applied to companies, and income the full from such 21% small business deduction. It should be noted that the small business deduction is available only if the corporation was a CCPC throughout the year. Therefore, where Canadian residents acquire control of a Canadian corporation from non-residents the small business deduction will not be available in the year that control changes. 2. Associated Corporations The concept of associated corporations was devised so that - 11 - taxpayers could not multiply their small business deduction entitlement merely by having a number of separate corporations to carryon various phases of their business. to force associated The effect of subsections 125(3) and (4) is corporations business limit among themselves. corporation is associated with to allocate the $200,000 per year Subsection 256( 1) defines when one another. Essentially, they are associated if one controls the other, both corporations are controlled by the same person or group of persons, or the two corporations controlled by ownership. related The groups definitions of can persons be and illustrated their is 10% are cross diagrammatically as follows: A (1) I 51% We One controls the other. will discuss control below. 1\ Both corporations are controlled by the same person or group of persons. i (2) (3) ,---.-. relate~l- !A~ x One corporation is controlled by a person who is related to the person who controls the other corporation, and one of those persons owns at least 10% of the issued shares of any class· of both corporations. 10% B ( 4) The person who controls one corporation is related to each member of the group of persons who controls the other corporation, and either the - 12 - person or the group of persons owns at least 10% of the issued shares of any class of the other corporation. ,.--.,.( 5) : cl" {' JaIl \ 1 1S% re1at;d 30% !m~ ~,~O% f (6) S1% "' I '\;:'r ~,-~ ... ~ / ~3 ~ Same as in (4) above except that there are two groups, with one group holding at least 10% of the shares of any class of both corporations. ~20% 20~~0% .,.,.-------. ..... ~ re1a/Kated" ,.--~ ~10% sr Two corpora~ions associated with the same corporation are associated with each other. 10%'-. S1% ABC It will be noted that unless one person or group of persons controls both corporations or unless one corporation controls the other corporation there are two requirements corporation will be considered associated: 1. The persons controlling each of the corporations must be related to each other, and 2. The persons controlling one corporation must own at least 10% of the shares of any class of the other corporation. - 13 - before the Under subsection 247(2) the Minister can deem two corporations to be associated if he is satisfied that they meet two tests: 1. The separate existence of those corporations is not solely for the purpose of carrying out the business of those corporations in the lOOst effective manner, and 2. One of the main reasons for such separate existence is to reduce the amount of taxes that would otherwise be payable. The definition of relationship in section 251 should also be noted. The definition of associated corporation is also important for the purposes of subsection intended to prevent the 129(6). That subsection is payer corporation from converting what would be business income taxes at the high corporate rates into property income by making deductible payments of a property nature (such as interest and rent) to an associated corporation which would otherwise treat the income as income from a property source and claim the refundable tax treatment· when it subsequently paid - 14 - dividends out subsection sharing of of that property 129(6) such payments the small income. would business not deduction In the be subject among absence to of the associated corporations since the small business deduction only applies to active business income and the income received by the associated corporation in this case would be property rather than business income. Subsection 129(6) will not apply to income which would not otherwise be treated as property income -in the hands of the recipient (so it does not apply to management fees and service fees), nor does it apply where the payer corporation does not earn active business income and therefore cannot deduct the payment from active business income. Where the subsection applies the payment, to the extent that it was deducted in computing the payer corporation's active business income, will be treated in the hands of the recipient corporation as active business income. 3. Part II Tax Active business income earned in taxation years commencing after 1982 which has benefitted from the full 21% small business deduction is subject to a-further 12 1/2% tax under Part II of the Income Tax Act when it is distributed as dividends. The purpose of this tax is to increase the level of taxation on income flowing through a corporation to the level of taxation which would have - 15 - applied had the income been earned directly by an individual. This "integration" assumes that the corporate income was subject to combined provincial and federal tax of 25% initially and that the provincial personal tax rate is 47% of basic federal tax. you may be aware, the Saskatchewan basic personal t~x As rate is 51% of federal tax, so the integration is imperfect. Part II tax is imposed on the Corporation paying the dividends, not on the recipient. In simplified terms the tax is equal to the lesser of 1/8 (i.e. 12 1/2%) of taxable dividends paid and 1/9 of the corporation's retained benefitted from the 21% small business deduction. earnings which Consider the following example which uses the theoretical tax rates on which the tax is based. Assume that the individual is in the highest tax bracket. Earned by Individual Income Basic corp. tax Part II tax Dividend paid Dividend gross-up Included in individual's income Individu~l tax Federal @ 34% Less dive tax credit Provo @ 47% Total individual tax Cash retained by individual Earned through Corporation Without Part With Part II Tax II Tax $100.00 $100.00 25.00 8.33 66.67 33.33 $100.00 25.00 100.00 100.00 112.50 34.00 34.00 38.25 34.00 iSo98 22.67 11.33 5.33 25.50 12.75 5.99 49.98 16.66 18.74 50.02 50.01 56.26 - 16 - 75.00 37.50 Using the rates which actually exist in Saskatchewan the results would be as follows: Earned through Corporation Wi thout Part With Part II Tax II Tax Earned by Individual Income Basic corp. tax Part II tax Dividend paid Dividend gross-up Included in individual's income Individual tax Federal @ 34% Less dive tax credit Prove @ 51% Prove surtax @ 12% Total individual tax Cash retained by individual $100.00 25.00 8.33 66.67 33.33 $100.00 25.00 100.00 100.00 112.50 34.00 34.00 38.25 34.00 17.34 2.08 22.67 11.33 5.78 .69 25.50 12.75 6.50 .78 53.42 17.80 20.03 46.58 48.87 54.97 $100.00 A corporation may have retained earnings 75.00 37.50 which did not benefit from the small business deduction (such as income earned in taxation years commencing before 1983, dividend and investment income, and active business income in excess of the corporation's small business deduction limits). However, for purposes of the Part II tax dividends are deemed to come first out of the taxable pool. For purposes of dividend refunds they may simultaneously be deemed to be paid out of passive income. Thus, a dividend may trigger both Part II tax and a dividend refund at the same time. - 17 - C. INVESTMENT INCOME Canadian investment income is defined in subsection 129(4). Essentially it means taxable capital gains in excess of allowable capital losses (disre~arding foreign source gains and losses, and gains and losses which accrued on property while it was owned by a corporation which was not corporation, an investment corporation, or a mutual property held for a corporation, fund investment property sources. Canadian Exempt a controlled mortgage corporation), minus income, losses and for dividends, private investment income from year from the and income of a non-CCPC from real property are specifically excluded. Income or losses from a specified investment business carried on in Canada are included in Canadian-source subsection 129(4.1). However, property income or losses: a corporation other than a if Canadian controlled private corporation carries on a specified investment business any income of that corporation from real property will not fall within the definition of investment income and will be taxed at full corporate rates. initially pay Saskatchewan), investment tax but income) at a the portion goes into full of a corporate that tax notional "refundable dividend tax on hand" (RDTOH) - 18 - 0 rate (16 account (52% of the called the 2/3% This portion of the tax is refundable to.the corporation on the basis of a $1.00 refund for every $4.00 which the corporation pays in dividends. The end result is that the corporation pays tax at a 35 1/3% rate i f all of its money is paid out as retained in the corporation. dividends rather than being To relieve the cash problem which the corporation will have in paying sufficiently large dividends to get all of the refundable tax back subsection 157(3) provides for reduction of the tax instalments on investment income by the estimated amount of the dividend refund. The purpose of the refundable tax is to prevent corporations from deferring tax at the second (shareholder) level by not paying dividends but to make the total tax payable at the corporate and shareholder levels equal to what would have been paid if the individuals had earned the investment income directly rather than through a corporation. integration is The following example illustrates that the imperfect, and that slight tax savings can be achieved by earning the investment income through a corporation. We will assume that the individual is in the highest tax bracket, and will compare the amount of tax which he would pay on $100 of investment income earned directly (about $53.42) with the amount of tax which he pays when that investment income flows through a private corporation: - 19 - Interest income $100.00 ). Corporate tax @ 52% 52.00 Amount in RDTOH 16.67 Di'\Tidend paid Dividend gross-up Amount on which shareholder tax is calculated 64.67 32.33 Federal tax on shareholder Less dividend tax credit 97.00 $32.98 21.99 Provincial tax @ 51% federal tax 5.60 Provincial surtax @ 12% .67 17.26 Total shareholder tax Total corporate tax Less dividend refund 10.99 $52.00 16.67 Total tax 35.33 $ 52.59 Tax savin~ by usin~ a corporation: $53.42 - 52.59 = $.83 To prevent corporations which earn business income in excess of their small business deduction entitlement from converting that business income to investment income by renting premises from or paying interest to an associated corporation, subsection 129( 6) provides that to the extent that an amount paid to an associated corporation is deductible from the active business income of the - 20 - payer corporation it will retain in the hands of the recipient associated corporation the character of the income from which it was deducted by the payer corporation. Consequently, it will not be eligible for the refundable tax treatment illustrated above. D. DIVIDEND INCOME With certain exceptions section 112 allows a corporation to deduct from its income taxable dividends received from taxable Canadian corporations and from corporations resident in Canada and controlled by it. Section 113 gives a similar deduction for certain dividends from non-resident corporations. 1. Part IV Tax In the individual or corporations, case of a public corporation a related group the special benefit of of controlled individuals, sections and 112 and by an private 113 is partially taken away by section 186 which imposes the 25% Part IV tax on such dividends when they are received by the corporation. An exception to the Part IV tax is made in the case of dividends received from a corporation with which the recipient is "connected" which do not generate a dividend refund to the payer (i.e. dividends out of non-passive income). - 21 - "Connection" is defined in subsection 186(4) to mean control of the payer corporation by the recipient corporation or ownership by the recipient corporation of share capital of the payer corporation having more than 10% of the voting rights and more than 10% of the fair market value of all the issued shares of the capital stock of the payer corporation. "Control" means ownership of more than 50% of the voting shares by the other corporation, by persons with whom the other corporation does not deal at arm's length, or by a combination thereof: A controls Company B for subsection 186(2). Company the purposes of Part IV tax in the following illustration: Mr. A I' A is 251(2)(b)(iii) I 100% Ico. A, Company Mrs. A r. related and to Mrs. therefore [paragraph 25I( 2)(a)]. ~co. 5% is A by not 95% B virtue at arm's J of subparagraph length with her Therefore, i t can be said that more than 50% of the voting shares of Company B are owned by Company A or by persons with whom Company A does not deal at arm's length. Company A controls Company B even though they are not associated corporations. The 25% tax on dividends is fully refundable when dividends are paid by the recipient corporation. - 22 - The mechanism of the RDTOR is used to achieve this end, since the entire 25% tax goes into the ROTOH. The following example illustrates that the same total amount of tax is paid whether the dividend is received by the individual directly or through an intermediary private corporation: Dividend Received Directly by Individual Dividend income Plus gross-up $100 50 Federal tax @ 34% Less dividend tax credit 51.00 34.00 Provincial tax (including surtax) - $150.00 17.00 9.71 Total tax - 26.71 Dividend Received through Private Holding Company Dividend received by company Part IV tax (refundable under section 129) - $100.00 25.00 100.00 Dividend paid Tax on individual shareholder (as above) - $ 26.71 Total tax - $ 26.71 A private corporation can reduce the amount on which the Part IV tax is calculated, if it so chooses, by the following amounts: (a) Allor part of its non-capital loss or farm loss for - 23 - the year; and (b) Allor part of its non-capital losses or farm losses for the preceding 7 or the suceeding 3 taxation years. If this is done t the losses cannot later be deducted in computing taxable income: paragraphs 186(l)(c) t 11l( 3)(a)(ii). Assume that a private corporation receives taxable dividend income in the year of $10 t OOO and incurs interest expense attributable to that income of $9 t OOO. The corporation's non-capital loss is $9 t OOO computed as follows: Taxable dividend income Less interest Income Less amount of dividend: 112(1) - subsection Non-capital loss - In these circumstances the corporation could elect to reduce the amount of $10 t OOO on which Part IV tax would otherwise be payable by all or part of its non-capital loss of $9,000. The purpose of the refundable tax on dividends received by private corporations is to prevent the corporation from deferring - 24 - tax on dividend income merely by not payin~ the dividends out to its individual shareholders. The dividend refund is calculated at the end of the year, and to be entitled to it, the corporation must be a private' corporation at the end of the year. 2. Part II Tax Where a corporation which is paying dividends has retained earnings which benefitted from the 21% small business deduction, the special benefit of sections 112 and 113 is also partially taken away by section 181 which imposes the 12 1/2% Part II tax on such dividends. This is a tax on the paying corporation, not the recipient, and it is not refundable. It applies no matter who the shareholder is - individual, associated corporation or other. The concept of Part II tax has been described earlier in this paper. It is beyond the scope of this paper to discuss all of the details of the Part II tax or the anti-avoidance rules connected with it. E. ABILITY TO PAY CAPITAL DIVIDENDS AND LIFE INSURANCE CAPITAL DIVIDENDS The concept of the "capital dividend account" allows certain non-taxable receipts of a private - 25 - corporation to retain their non-taxable character as shareholder. free half throu~h to the corporation's The capital dividend account is made up of the tax of corporations they flow capital out of gains, their dividends capital from dividend other private accounts, the non-taxable portion of eligible capital amounts, and the excess of life insurance pre-June·29, proceeds 1982, received policy over by the corporation the adjusted cost base from of a the policy. To the extent that the private corporation has a positive balance in this notional account it can elect under subsection 83( 2) that any dividends which it pays are capital dividends and therefore non~taxable in the hands of the shareholder. privilege is not available to public corporations. corporations receive non-taxable amounts those This When public amounts will be taxed at the full rate when they are passed on to shareholders. The life insurance capital dividend account is made up of the excess of life insurance proceeds received by a corporation on a policy of which the corporation was not a beneficiary on or before June 28, 1982, over the adjusted cost base of the policy. Life insurance capital dividends received by the corporation from another corporation dividend account. also go into its life insurance capital The life insurance capital dividend account works in much the same way as the capital dividend account. To the extent that a private corporation has a positive balance in this notional account it can elect under subsection 83(2.1) that - 26 - any dividends which it pays are life' insurance capital dividends and therefore non-taxable in the hands of a shareholder. The difference between capital dividends and life insurance capital dividends is that i f the share on which a life insurance capital dividend is paid was acquired (otherwise than by way of purchase) as a consequence of the death of a person (e.g. it was inherited) the life insurance capital dividend will reduce its adjusted cost base under para~raph ·S3(2)(r). If the adjusted cost base of the share thus becomes a negative amount there will be an immediate capital gain: capital subsection 40( 3). dividend was added to The concept of life insurance the Act in 1982 to circumvent procedures which were commonly used to defer taxation upon death of accrued capital gain on corporate shares. III. TAXATION OF CORPORATE DISTRIBUTIONS A. INTRODUCTION "Dividend" is a residuary expression. If a distribution to shareholders cannot be classified in some other way, for instance as interes t, rent, salary, or shareholder appropriation, it is a dividend. Dividends paid by a corporation are not deductible in calculating its taxable income. Thus, there is taxation both at the corporate and shareholder levels. in cash. They can be paid Dividends need not be paid in kind or in the stock of other - 27 - corporations. A stock dividend (that "is, the issuance of further stock in the corporation) no longer falls within the definition of "dividend" if it is paid by a public corporation, except in very limited circumstances, or by a non-resident corporation. Such stock when issued by a public or non-resident corporation receives capital gain rather than income treatment, in that the adjusted cost base of the shares is considered to be zero. When a private corporation issues a stock dividend the shareholder is taxed as on any other dividend and is amount equal to the amount deemed to acquire the shares of the stock dividend: at an subsection 52(3) • Apart from dividends, amounts received from a corporation might be treated as shareholder appropriations under subsection 15( 1), as a loan tmder subsection 15( 2), as an indirect payment under subsection 56(2), or as imputed interest under section 80.4. B. TAXATION OF DIVIDENDS IN THE SHAREHOLDERS' HAND Paragraph reci pient , 12( 1) (j) subj ect to makes all such provis ions dividends as income subsect ions to 83 (2) the and (2.1), which allow shareholders to receive non-taxable dividends. When the shareholder is an individual and the dividend is from a taxable Canadian corporation, not only is the dividend itself included in his income, but an additional one-half of the amount - 28 - of the dividend is added to income. "gross-up". This is referred to as the Federal tax is computed on the grossed-up dividend, and a dividend tax credit equal to to 34% of the actual amount of the dividend is deducted from the federal tax otherwise payable before provincial tax on the dividend is computed. tax credit is provided for by section 121. The dividend Provincial tax is computed as a percentage of federal tax (51% in Saskatchewan plus a surtax of 12% on provincial tax in excess of $4,000) after deduction of the dividend tax credit. The treatment of dividends received by a corporation has already. been discussed. It will be noted that corporations which receive dividends do not get the gross-up and dividend tax credit treatment. Corporations, like individuals, can receive tax free capital dividends and life insurance capital dividends out of the capital dividend account account respectively of and a life private insurance capital corporation. dividend Only if the recipient corporation is a private corporation itself can it pass the tax free characteristic of the dividend along to its own shareholders. Where an individual receives dividends from taxable Canadian corporations up to $1,000 of the grossed-up amount of the dividend is exempt from taxation by virtue of treatment is not available to corporations. - 29 - section 110.1. This The following example illustrates that if the individual has no income from other sources t a very substantial amount of dividend income can be received from taxable Canadian corporations without payment of any tax at the shareholder level: $42 t OOO Dividend income Plus gross-up ii t o66 $63 t OOO Less personal exemption [s. 109 (l)(c)] and s. HO.1 $l t OOO dividend deduction $14 t 121 14 t 280 Federal tax Less s. 121 dividend tax credit Nil Nil Provincial tax C. DEEMED DIVIDENDS The general rule is that a shareholder is entitled to receive back his investment in a corporation on a tax free basis. The problem is to determine whether the amount which he receives is a return of his investment or a distribution of income earned by the corporation. shareholder upon If a corporation makes a distribution to a the winding up or reorganization of the corporation t upon a reduction of capital t or upon the redemption or acquisition by the corporation of shares of the corporation t the shareholder is deemed to have received a dividend if the return to him exceeds the paid up capital with respect to those shares. Such dividends are not eligible for the $l t OOO interest - 30 - and dividend deduction, but if they are received by an individual from a taxable Canadian corporation they are entitled, like other dividends, to the gross-up and dividend tax credit treatment. Paid up capital of shares in a corporation is determined on a class by class or series by series basis. If a transaction relating to a certain number of shares causes an increase in the paid up capital of those shares, then the increase is averaged out over the whole class or series. Therefore, the paid up capital of a given share is determined as a proportion of the paid up capital of all the shares in the class or series. individual was issued 100 treasury shares For example, if an of a corporation for $100, the paid up capital of the class of shares would, assuming that there are no other shares outstanding, be $100. If, several years later, a further 100 shares of the same class were issued, but this time for $2.00 each, the paid up capital of the whole class would be $300, and the paid up capital of each share would be $1.50. There are several exceptions to the principle that paid up capital for tax purposes is equivalent to stated capital for corporate purposes, but these exceptions are beyond the scope of this paper. There are several common situations in which a shareholder will be deemed to receive a dividend Income Tax Act: - 31 - under section 84 of the (a) A dividend will be deemed where an increase in paid up capital is not matched by an increase in the net assets of the corporation. This would occur when assets are sold to a corporation for more than their fair market value, in exchan~e for shares of the corporation. The deemed dividend will affect the whole class of shares. (b) Where assets or funds are distributed to shareholders on the windin~ up, discontinuance, or reor~anization of the corporation a dividend is deemed to have been paid equal to the value of funds or property distributed minus the amount reduced on the by which the distribution. paid up Again, capital is the deemed dividend affects the whole class of shares, and to determine the amount of the deemed dividend received by an individual shareholder one must take the proportion of the deemed dividend that his shares are to all the issued shares in the class. (c) Where a corporation redeems, acquires, or cancels its shares (such as upon a corporate repurchase of shares) there is a deemed dividend if the the amount received exceeds the 'paid up capital of those shares. Such a deemed dividend affects only the shares involved and not the whole class. - 32 - Where the corporation acquires its own shares in the open market there is no deemed dividend: (d) subsection 84(6). Any other reduction of paid up capital gives rise to a deemed dividend equal to the excess of the amount paid by the corporation over the amount by which the paid up capital was reduced. D. SHAREHOLDER BENEFITS AND APPROPRIATIONS Subsection 15( 1) deals with appropriations of property to shareholders and the conferral of. benefits on shareholders by a corporation. ) It reads as follows: . "(1) Wherein a taxation year (a) a payment has been made by a corporation to a shareholder otherwise than pursuant to a bona fide business transaction, (b) funds or property of a corporation have been appropriated in any manner whatever to, or for the benefit of, a shareholder, (c) a benefit or advantage has been conferred on a shareholder by a corporation, otherwise than (d) on the reduction of capital, the redemption, cancellation or acquisition by the corporation of shares of its capital stock or the winding-up, discontinuance or reorganization of its business, or otherwise by way of a transaction to which section 88 applies, (e) by the payment of a dividertd or a stock dividend, (f) by conferring on all holders of common shares of the capital stock of the corporation a right to buy additional common shares thereof, or - 33 - (g) by an action described in paragraph 84(1) (c.1) or (c.2), the amount or value thereof shall, except to the extent that it is deemed to be a dividend by section 84, be included in computing the income of the shareholder for the year." Income will not be imputed to a shareholder unde subsection 15(1) where the payment is made pursuant to a bona fide business transaction between the shareholder and the corporation, where the entire amount would be covered by the deemed dividend provisions in section 84, or where the benefit is the conferral on all common shareholders of the right to buy additional common· shares at a price which is lower than the prevailin~ Canada's position on some of these matters Interpretation Bulletins which are market price. is attached set to Revenue out in two this paper: IT-116R and IT-432. Paragraph 15( 1) (c) has been applied to tax a shareholder receiving excessive payments in consideration of the "goodwill" of a business which he transferred to M.N.R., [1957] C.T~C. the company. In Losey v. 146, a business with net assets of about $8,750 was transferred to a corporation for $85,000, the extra consideration being attributed to the goodwill of the business. The Exchequer.Court held that the goodwill was worth no more than $1,000, former so the annual proprietor in payments made by the corporation to respect of the goodwill were the considered taxable benefits under paragraph (c) to the extent in excess of - 34 - $1,000. Personal use of company assets might also be considered a shareholder benefit. In Zakoor v. M.N.R. (1964), 35 Tax A.B.C. 378 the the taxpayer had use of a new, company-owned, $8,000 automobile each year, and the Tax Review Board held that he had received a taxable benefit equal to the 33 1/3% "luxury element" of the capital cost allowance plus 20% of· the remaining normal expenses. Today, subsection 15(5) incorporates by reference subsections 6( 1), (2), and (2.2) relating to employee automobile benefits to determine the amount of shareholder benefit from an automobile. free Free holiday trips, improvements to the free shareholder's living accommodation, property might also or be considered shareholder benefits. When amounts are included in a taxpayer's income subsection 15(1) they are taxed as ordinary income. is no enti tlement dividends. received to the special tax under Thus, there treatment accorded Furthermore, the corporation from whom the benefit is gets no deduction for the amount taxed in the shareholder's hands, resulting in double taxation. Section 56(2) provides for the taxation of indirect payments where a payment or transfer of property is made pursuant to the direction of a taxpayer to some other person for the benefit of the taxpayer or as a benefit that the taxpayer desires to have conferred on the other person. In M~N.R. v~Bronfman, [1965] - 35 - C.T.C. 378, 65 D.T.C. 5235 the Exchequer Court held that directors who had concurred in large sums of money being given as wedding gifts to their relatives and to needy retired employees were taxed on the amount shareholdings. of the gifts in proportion to their own The case invoved the application of subsection 56(2). The section has occasionally been used successfully by Revenue Canada to attack personal service corporations [e.g. Barbeau v. The Queen, [1981] C.t.C. 496, 84 D.T.C. 6148 (F.C.)] and dividend sprinkling [e.g. Champ v •. The Queen, (1983] C.T.C. 1, 83 D.T.C. 5029 (F.C.)]. E. LOANS TO SHAREHOLDERS Subsection 15(2) is designed to discourage the withdrawal of corporate profits in the guise of loans or other indebtedness. reads as follows: "(2) Where a person (other than a corporation resident in Canada) or a partnership (other than a partnership each member of which is a corporation resident in Canada) is a shareholder of a particular corporation, is connected with a shareholder of a particular corporation or is a member of a partnership, or a beneficiary of a trust, that is a shareholder of a particular corporation and the person or partnership has in a taxation year received a loan from or has become indebted to the particular corporation, to any other corporation related thereto or to a partnership of which the particular corporation or a corporation related thereto is a member, the amount of the loan or indebtedness shall be included in computing the income for the year of the person or partnership, unless - 36 - It (a) the loan was made or the indebtedness arose (i) in the lender's and, in lending ordinary ordinary course of the or creditor's business the case of a loan, the of money was part of its business, (ii) in respect of an employee of the lende r or creditor or the spouse of an employee of the lender or creditor to enable or assist the employee or his spouse to acquire a dwelling for his habitation, (iii) where the lender or creditor is a corporation, in respect of an employee of the corporation to enable or assist the employee- to acquire from the corporation fully paid shares of the capital stock of the corporation, or to acquire from corporation related thereto fully paid shares of the capital stock of the related corporation, to be held by him for his own benefit, or (iv) in respect of an employee of the lender or creditor to enable or assist the employee to acquire an automo bile to be used by him in the performance of the duties of his office or employment, and bona fide arrangements were made, at the time the loan was made or the indebtedness arose, for repayment thereof wi thin a reasonable time; or (b) the loan or indebtedness was repaid within one year from the end of the taxation year of the lender or creditor in which it was made or incurred and it is established, by subsequent events or otherwise, that the repayment was not made as part of a series of loans or other transactions and repayments." - 37 - Subsection 15( 2) applies to all kinds of indebtedness, not just to loans actually received from the corporation. for example, shareholder on apply if the corporation It instalments. sold applies not It would, property only to the where the shareholder himself incurred the debt, but also where a person "connected with a shareholder" [defined in subsection 15(2.1)] incurred the the debt, or where debtor is a member of a partnership or the beneficiary of a trust which is a shareholder of the corporation. It will be noted that there are a number of exceptions to the rule that a shareholder must include in his income the amount of indebtedness owing to the corporation. these involves the repayment period. The most important of No matter for what purpose the debt was incurred it will not be included in the shareholder's income if it is repaid within 1 year from the end of the taxation year of the lender in which i t was made, as long as the loan is not part of a series of loans and repayments. .. If repayment is not made in time to avoid inclusion of the loan in the shareholder's income, but is subsequently repaid; and is not part of a series of loans and repayments, the future payments can be deducted from the shareholder's income when they are made: paragraph 20(1)(j). - 38 - Although there loan, section is 80.4 no obligation deems a to charge shareholder or interes t employee on a to have received a benefit to the extent that the interest charged on such a loan is less than quarter of 1985). the prescribed rate (10% for the second The imputed benefit is deemed by section 80.5 to be interest paid by the shareholder or employee. Therefore, if the debt was incurred for a purpose (such as purchase of shares) which would otherwise allow for deduction of interest the imputed interest benefit can be cancelled out by a corres·ponding interest deduction. IV. HOLDING COMPANIES Holding companies dividend income. slight tax are neutr~l in their tax effect on With respect to investment income there can be a saving from the mere fact of incorporation, as illustrated by the following example which compares the total tax which would be paid when investment income is flowed through a private corporation with the tax which would be paid if such income were earned directly by an individual in the highest tax bracket. 1985 Saskatchewan rates are used. Accordingly, all income at the individual level is taxed at a combined federal and provincial marginal rate of 53.42%. - 39 - Individually 1) 2) 3) 4) 5) 6) 7) 8) 9) 10) 12) 13) Income Earned Corp. Tax Retained in Corp. R.D.T.O.H. Received by Shareholder Gross-up (1/2 Dividend) Taxed at Individual Level Personal Tax Less Dividend Tax Credit Retained by Individual (5-10) Income Tax Deferral Through Incorporation Absolute Income Tax Savings Through Incorporation Through Corporation $100,000 $100,000 52,000 48,000 16,670 64,670 32,335 97,005 51,821 34,547 100,000 100,000 53,421 46,579 47,396 1,421 817 An individual in a lower tax bracket would suffer prepayment of tax through incorporation of his investments'and if his income was so low that he could not fully utilize the dividend tax credit there would be an absolute income tax cost to incorporation. Consider the following example of an indiviual with $25,000 of investment income and no other sources of income. Personal exemptions and the $1000 investment deduction are ignored. Individually 1) 2) 3) 4) 5) 6) Income Earned ~ Corp. Tax Retained in Corp. R.D.T.O.H. Received by Shareholder Gross-up (1/2 Dividend) 7) Taxed at Individual Level 8) Personal Tax Federal Div. tax credit Provincial 9) Retained by Individual 10) Income Tax Prepayment Through Incorporation ll) Absolute Income Tax Cost of Incorporation $ 25,000 25,000 25,000 7,582 17,418 Through Corporation $ 25,000 13,000 12,000 4,168 16,168 8,084 24,252 0 4,639 (5,497) 0 0 16,168 5,418 1,250 - 40 - The biggest investments is advantage to to allow one to one's personal income. adjusting the amount one owns shareholders of shares avoid a holding dramatic company for fluctuations in Income levelling can be accomplished by of dividends corporation to its shareholders. where using in an which are paid by the This is particularly important operating company and the other the operating company want dividends paid at a time which might be inopportune for oneself. If one owns the shares through a holding company there would be no necessity to take the dividends into one's personal hands right away. levelling can also be Income accomplished by borrowing money from the corporation in low income years (which will be included in income under subsection 15(2) in the circumstances which have already been discussed) and paying it back in high income years [when one would get a deduction under paragraph 20(1)(j)] provided that it was not part of a series of loans and repayments. Of course, there would be an imputed interest benefit under section 80.4 if less than a commercial rate of interest was charged on the loan. v. SHOULD ONE INCORPORATE? If one's personal tax rate is at a sufficiently low level we have seen that it is not possible to fully utilize the dividend tax credit, and more tax will be paid with a without a corporation. corporation than One must have in excess of $40,000 of - 41 - taxable income to break even on tax as corporation rather detailed than discussion of being the earned income flows personally. advantages and throu~h For a a very disadvanta~es of a corporation reference should be made to Kellough and McQuillan, "The Decision To Incorporate" in Taxation 'Of Private Corporations And Their 'Shareholders at 27. of the points which The following is a summary of some should be considered. First the disadvantages: 1. Corporate rather than personal ownership of business assets (such as the family farm) may entail some emotional cost; 2. Incorporation costs and the on~oin~ legal and accounting fees for incorporation are not inconsequential; 3. It can be very expensive from a tax point of view to undo a corporate structure when assets have been transferred to a corporation; 4. Losses cannot be transferred out of a corporation. If the incorporated business losses is unsuccessful the business cannot be set against personal income from other sources; 5. Interest and dividends from non-arm's length sources do not qualify for the $1,000 investment deduction under section - 42 - 110.1. If one has a corporation one should ensure that sufficient investments are retained in one's personal hands to yield $1,000 of qualifying interest and dividend income; and 6. British Columbia, Quebec levy Saskatchewan, capital taxes Manitoba, on Ontario, corporations. and While Saskatchewan has a substantial threshold before the capital tax kicks in, Ontario and Quebec have a minimum capital tax of $50.00 and $100.00 respectively. There are a number of advantages to incorporation: 1. A corporation ~ives one limited liability and perpetual existence; 2. Certain special tax rules are available only to -corporations, such as the section 125.1 manufacturing and processing tax credit; 3. A parent who wants to pass on his business to his child can defer tax on the first $200,000 of capital gains when shares of a small business corporation are transferred to the child either on death or inter vivos. No such deferral of capital gains is available when an unincorporated business (other than a family farm) is transferred to a child; and - 43 - J 4. Corporations renting, whose developing prevented from principal or business selling of creatin~ losses real is leasin~, the property through are capital not cost allowance claims. The decision to incorporate is one which must be made on a case by case basis. In some cases the intangible factors, such as increased complexity, will tip the scales against incorporation. In many instances, unless the proposed business carries with it great liability risks, it is best to start out without a corporation and to incorporate only after the operation has become profitable. This will not be the case, however, where the business involves the buying and selling of real property, since real estate inventory cannot later be rolled into a corporation. ... 44 - DEPARTMENT OF NATIONAL REVENUE, TAXATION INTERPRETATION BULLETIN MINISTERE OU REVENU NATIONAL, IMPQT , D'INTERPRETATIOr{ SUBJECT: INCOME TAX ACT Rights to Subscribe to Common Shares OBJET SERIAL NO: IT-116R DATl5eptemberl5.1975 REFERENCE: Paragraph 15( I )(f) (also subparagraphs 115(1 )(b)(iii) and (iv) and subsection 115(3» NODE SERlE: IT-116R OATE: Ie 15 septembre 1975 RENVOI: Alinea 15(1)f) (voir aussi les sous~alineas 1150)b )(iii) et (iv) et Ie paragraphe 115(3» This bulletin replaces and cancels Interpretation Bul/etin IT-116 dated August 9,1973. Cc bulletin rem place et annule Ie Bulletill J 'in til IT-116 du 9 aout 1973. 1. Pursuant to paragraph 15(1 )(f), when the right to buy additional common shares is conferred on all holders of common shares, no amount or value is thereby included in computing the shareholder's income. Subsection 248( 1) defines a common share as "a share the holder of which is not precluded upon the reduction or redemption of the capital stock from participating in the assets of the corporation beyond the amount paid up thereon plus a fixed premium and a defined rate of dividend". 1. Suivant I'alinea IS(1 )0, lorsque tous de kntcurs d'actions ordinaires se voient attribuer Ie droi~ d'acheter d'alltres actions ordinaires, aucun montant ni valeur n'est par Iii inclus dans Ie calcul du revenu des actionnaires. Le paragraphe ~480.1 definit une action ordinaire comme "une action dont Ie deteni:eur n'est pas empeche, lors de la reduction ou du rachat du capital-actions, de participer dans l'actif de la corporation au-deIa de la somme versee pour cette action, d'une prime fixe et d'un taux determine de dividende". 2. Where rights to subscribe for common shares are issued by a Canadian corporation it may be that certain non-resident shareholders are barred from subscribing for such shares. This situation may be caused by restrictions in a Canadian law or because the corporation did not comply with the securities regulations in the country where the non-resident shareholders reside. In these circumstances, paragraph 15(1 )(f) is still considered to apply provided that rights are in fact issued to the non-resident shareholders and they are .entitled to sell such rights. 2. Advenant que les droits de sOllscription d'actions ordinaires soient emis par une corporation canadienne, il peut se presenter des cas ou certains actionnaires non-residents soient empeches de souscrire ces actions. Ceci pellt provenir des restrictions d'une loi canadienne ou du fait que la corporation ne se conformait pas aux reglements sur les valeurs en vigueur dans Ie pays ou reside les actionnaires non-residents. Dan5 ces circonstances, I'alinea I sO)f) est encore repute s'appliquer pourvu que les droits soient effectivement emis a des actionnaires non-residents et ils sont autorises ales vendre. 3. It may happen that a shareholder does not receive rights to subscribe for additional common shares solely for the reason that his holdings are too small to entitle him to sufficient rights to purchase a full share. For example, a holding of five shares may entitle the owner to purchase one additional share and a shareholder may only own four shares. In these circumstances, paragraph ISO )(f) is considered to be applicable if the rights so withheld are issued to a trustee who sells them and pays the proceeds, less expenses, on a pro rata basis to the shareholders concerned. 3. n peut se presenter des cas ou un actionnaire n'acquiert pas de droits de souscription de nouvelles actions ordinaires, pour la seule raison que son avoir en actions est trop petit pour lui permettre d'avoir les droits suffisants pour acheter une action complete. Par exemple, un avoir de cinq actions peut autoriser leur proprietaire a acheter une action supplementaire; or, un actionnaire peut ne detenir que quatre actions. Dans ce cas, les dispositions de 1'alinea 150)f) sont reputees pouvoir s'appliquer si les droits ainsi refuses reviennent a l'actionnaire apres qu'un fiduciaire, a qui ils ont ete emis, les lui vende Ie produit, moins les depenses, repartis sur une base proportionnelle entre les actionnaires concernes. 4. Rights to buy additional common shares are normally capital property having no cost (unless they are purchased) and thus a capital gain may arise if they are disposed of rather than exercised. 4. Les droits a l'achat de nouvelles actions ordinaires sont normalement des biens en immobilisations n'ayant pas de COli t (a moins, qu'ils aient ere achetes) et de ce fait, ils peuvent donner lieu a des gains en capitaux au cas ou ils sont cedes plutat qu'exerces. PUBLISHEC UNCER THE AUTHORITY OF THE CEPUTY MINISTER OF NATIONAL REVENUE FOR TAXATION LOI DE L'IMPOT SUR LE REVENU Droits de souscription d'actions ordinaires Y [J7I: fa tion PUBLIE: AVEC L'AUTORISATION CU SOUS-MINISTRE CU REVENU NATIONAL POUR L'IMPOT REVENUE CANADA. TAXATION INTERPRETATION SUBJECT: NO: IT-432 REFERENCE: BULLETIN REVENU CANADA. IMP(lT D'INTERPRETATION LOI DE L'IMroT SUR LE REVENU Attribution de biens it des actionnaires INCOME TAX ACT Appropriation of Property to Shareholders OBJET: June 25,1979 Subsection 15(1) (also subsections 52(1), 56(2)! 69(1), 84(1) and 245(2)) IT-432 OATE Ie 25 juin 1979 RENVOI: Paragraphe 15(1) (aussi paragraphes 52(1), 56(2), 69(1), 84(1) et 245(2)) DATE: General 1. The purpose of subsection 15(1) is to include in a shareholder's income the amount or value of any distribution of corporate property and the value of any benefit conferred on the shareholder which would not otherwise be included therein and which cannot properly be considered as a return of capital or as having been received in his capacity as an employee; in the latter case the provisions of paragraph 6(1)(a) are applicable. In certain circumstances other provisions of the Income Tax Act apply to include such amounts in the shareholder's income. Consequently, pursuant to paragraphs 15(1)(d) and (e), no amount is to be included in the shareholder's income under subsection 15(1) where the corporate property is distributed to the shareholder by a resident or non-resident corporation: (a) on the reduction of capital, (b) on the redemption, cancellation or acquisition of shares, (c) on the winding-up, discontinuance or reorganization of the corporation's business, (d) on the winding-up of a Canadian corporation (e) on the dissolution of a foreign affiliate and (f) on the payment of a dividend or stock dividend. NO: Generalites 1. L'objet du paragraphe 15(1) est d'inclure dans Ie revenu d'un actionnaire Ie montant ou la valeur de toute attribution de biens d'une corporation et la valeur de tout avantage accorde a I'actionnaire qui ne pourraient par ailleurs y etre indus et qui ne peuvent dument etre consideres comme un remboursement de capital ou comme ayant ete r~us en sa qualire d'employe; dans ce dernier cas, les dispositions de I'alinea 6(1)a) s'appliquent. Dans certaines circonstances, d'autres dispositions de la Loi de l'impot sur Ie revenu s'appliquent pourinclure de tels monbmts dans Ie revenu de I'actionnaire. En consequence, conformement aux alineas 15(1)d) et e), aucun montant ne doit etre indus dans Ie revenu de l'actionnaire en vertu du paragraphe 15(1) lorsque Ie bien de la corporation est attribue it I'actionnaire par ) corporation residante ou non residante lors: a) de la reduction du capital, b) du rachat, de I'annulation ou de I'acquisition d'actions, c) de la liquidation, de la cessation ou de la reorganisation de I'entreprise de la corporation, d) de la liquidation d'une corporation canadienne, e) de la dissolution d'une filiale etrangere et f) du paiement d'un dividende ou d'un dividende en actions. 2. Pursuant to paragraph 15(1)(f), no amount is to be included in a shareholder's income under subsection 15(1) where the benefit arises from a resident or non-resident corporation conferring a right on all common shareholders to purchase additional common shares. For further com'ments in this regard see Interpretation Bulletin IT-116R, 2. En vertu de l'alinea 15(1)f), aucun montant ne doit etre inclus dans Ie revenu d'un actionnaire en vertu du paragraphe 15(1) lorsque l'avantage provient du fait qu'une corporation residante ou non residante attribue Ie droit it tous les detenteurs d'actions ordinaires d'acheter d'autres actions ordinaires, Pour de plus amples renseignements it cet egard, voir Ie Bulletin d'interpretation IT-II6R. 3. Where a shareholder sells or otherwise transfers assets to a corporation and the consideration received consists of or includes shares in the capital stock of the corporation and the paid-up capital of these shares issued by the corporation exceeds the value of its net asset increase, if any, subsection 84(1) deems the amount of such excess to be a dividend received by all persons owning shares of the particular class and in proportion to their shareholdings. In addition, if the fair market value of the non-share consideration exceeds the fair market value of 3. Lorsqu'un actionnaire vend ou par ailleurs transfere des biens it une corporation et que la contrepartie re~ue consiste en ou comporte des actions du capital-actions de la corporation et que Ie capital verse de ces actions emises par la corporation excede la valeur de l'augmentation nette de I'actif, s'H en est, Ie montant·de I'excedent est repute par Ie paragraphe 84( I) etre un dividende re~u par toutes les personnes detenant des actior . ~l la categorie particuliere, en proportion de leur portefeuille.. outre, si la juste valeur marchande de la contrepartie ne consistant pas en actions excede la juste valeur marchande des biens ~.LISHED UNDER THE AUTHORITY OF THE DEPUTY MINISTER OF NATIONAL REVENUE FOR TAXATION au SOUS-MINISTRE DU REVENU NATIONAL. POUR L.'IMPOT ~UIILIE AVEC L'AUTORISATION IT-432 2 ) the assets sold or transferred, such excess is included in income pursuant to subsection 15( 1). The result is that the taxable amount is brought into income under subsection 84( I) to the maximum extent possible and the remainder, if any, under subsection 15( I). The foregoing comments' are illustrated in the following example. Assumptions: $ 500 Fair market value of assets transferred Paid-up capital of shares issued $1,000 Fair market value of non-share $1,200 consideration 84(1) Deemed Dividend: Paid-up capital increase $1,000 84(1)(d) net asset increase, if any ($500 - $1,200 ) 84( 1) deemed dividend $1,000 15(1) Income Amount: Fair market value of non-share consideration $1,200 Fair market value of assets transferred $ 500 15(1) income amount (the net asset decrease) $ 700 vendus outransferes, cet excedent est indus dans Ie revenu en vertu du paragraphe 15(1).11 en resulte que Ie montant imposable entre dans Ie revenu en vertu du paragraphe 84( I) jusqu' a concurrence du maximum possible et que Ie reste, s'il en est, y entre en vertu du paragraphe 15(1). Les observations qui precede~t sont illustrees par l'exemple suivant. Hypotheses: Juste valeur marchande des biens transferes $ 500 Capital verse des actions emises $1,000 Juste valeur marchande de la contrepartie ne consistant pas en actions $1,200 Dividendes reputes en vertu du paragraphe 84(1): Augmentation du capital verse $1,000 Augmentation nette de I' actif en vertu de I'alinea 84(1)d), s'il en est ($500 - $1,200) Dividende repute en vertu du paragraphe 84(1) $1,000 Montant du revenu en vertu du paragraphe 15(1): Juste valeur marchande de la contrepartie ne consistant pas en actions $1,200 Juste valeur marchande des biens transferes $ 500 Montant du revenu en vertu du paragraphe 15(1) (la diminution nette de l'actif) $ 700 4. For resident shareholders, amounts brought into income are classed as income from property. For nonresident shareholders, paragraph 214(3)(a) deems such amounts to bea dividend to which the normal non-resident tax rules under Part XIII apply. Paragraph 214(3)(a) is for the purposes of Part XIII only. Consequently; the deemed dividend does not qualify as a dividend paid by the corporation for subparagraph 129(1)(a)(i). 4. Pour les actionnaires residants, les montants inclus dans Ie revenu sont classes comme etant un revenu tire d'un bien. Pour les actionnaires non residants, I'alinea 214(3)a) fait qu'un tel revenu est repute etre un dividende auquel les regles fiscales normales de la Partie XIII concernant les non-residents s'appliquent. L'alinea 214(3)a) ne vise que la Partie XIII. En consequence, Ie dividende repute n'est pas admissible a titre de dividende paye par la corporation aux fins du sous-alinea 129(I)a)(i). 5. Subsection 15(7) confirms that subsection 15(1) is applicable to a resident shareholder of a non-resident corporation even though that corporation is not, or was not, resident in Canada or has not carried on business in Canada. 5. Le paragraphe 15(7) conflI'Ille que Ie paragraphe 15(1) s'applique a unactionnaire residant d'une corporation non residante, meme si cette corporation n'est pas ou n'etait pas residante au Canada oun'a pas exploite une entreprise au Canada. 6. The words "shareholder" and "corporation" are defined in subsection 248(1). The "taxation year", as referred to in subsection 15(1), refers to the taxation year of the shareholder and not that of the corporation. 6. Les tennes "actionnaire» et "corporation» sont definis au paragraphe 248(1). L'"annee d'imposition» mentionnee au paragraphe 15(1) designe l'annee d'imposition de l'actionnaire et non celie de la corporation. 7. The rules in subsection 15(1) are supplemented by, and should be read in conjunction with, the provisions in subsections 56(2), (see IT-335), 245(2) and 245(3) in so far as they relate to indirect payments or transfers made by a corporation for the benefit of a shareholder or as a benefit that the shareholder desired to have conferred on some other person. For comments regarding dividends waived by one shareholder in favour of another shareholder see IT-208. 7. Les regles du paragraphe 15(1) ont comme complement (et dont la lecture doit etre simultanee) les dispositions des paragraphes 56(2), (voir Ie IT·335), 245(2) et 245(3) en ce qu'elles se rapportent aux paiements indirects ou aux transferts faits par une corporation pour l'avantage d'un actionnaire ou comme avantage que I' actionnaire desire voir accorder aune autre personne. Dans Ie IT-208, il y a des observations concernant des dividendes ayant fait l'objet d'une renonciation par un actionnaire en faveur d'un autre actionnaire. 8. Where an amount is to be included in the income of a shareholder under this subsection, such amount will not be allowable to the corporation as a deduction from income. 8. Lorsqu'un montant doit etre indus dans Ie revenu d'un actionnaire en vertu du present paragraphe, un tel montant ne sera pas deductible du revenu de la corporation. - - ===== 3 IT-432 Paragraphs 15(1)(a), (b) and (c) Not MutuaUy Exclusive 9. The following interpretations of subsection 15(1) have been grouped under the rules applicable to paragraphs 15(1)(a), 1S(l)(b) and 15(1)(c). It is to be noted, however, that these paragraphs are not mutually exclusive so that, in regard to a particular transaction, more than one paragraph may be invoked to establish that the transaction has resulted in income to a shareholder. Les alineas 15(1 )a), b) et c) ne s'excluent pas mutueUement 9. Les interpretations qui suivent du paragraphe 15( 1) ont { regroupees selon les regles applicables aux alineas 15(1)a}, 15(l)b) et 15(l)c). 11 est a noter toutefois que ces alineas ne s'excluent pas muteUement, ce qui fait que, par rapport a une operation particuliere, plus d'un alinea peut etre invoque pour etablir que I'operation a confere un revenu un actionnaire. a Paragraph 15(1)(a) Alinea 15(I)a) Meaning of "Bona· Fide" Signification d'operation commerciale ..veritable" 10. Paragraph 15(1)(a) is not applicable where a payment made by a corporation to a shareholder is pursuant to a bona fide business transaction. Normally, the test as to whether a transaction is bona fide is whether the terms and conditions are essentially the same as they would have been if the transaction had ~n completed between two parties dealing at arm's length. 10. L'alinea 15(1)a) ne s'applique pas 10rsqu'un paiement fait par une corporation a un actionnaire est verse en vertu d'une operation commerciale veritable. Nonnalement, la faC;on de savoir si une operation est une operation veritable est de savoir si les conditions sont essentiellement les memes qu' eUes auraient ete si la transaction avait ete faite entre deux parties n'ayant pas de lien de dependance. Paragraph 15(1)(b) AUnea 15(I)b) Application Application 11. Generally speaking, any transfer of property by a corporation to or on behalf of a shareholder for inadequate or no consideration may give rise to an appropriation of property within the meaning of paragraph 15(1)(b) unless the provisions of paragraphs (d), (e) or (f) apply. For purposes of paragraph 15(l)(b), as elsewhere in the Act, the word •'property" is not restricted to real estate but has the broad meaning given to it in subsection 248(1). 11. En general, tout transfert de biens par une corporation aun actionnaire ou pour celui-ci, pour une contrepartie inadequate ou nulle, peut entrainer une attribution de biens au sens de I'alinea 15(1)b), a moins que les dispositions des alineas d), e) ou f) ne s'appliquent. Aux fins de I'alinea 15(1)b), com~ aiUeurs dans la Loi, I'expression ..bien" ne se rapporte ~ uniquement aux biens immeubles mais a Ie sens large que lui donne Ie paragraphe 248( 1). Cost of Property Acquired by Shareholders Coot des biens acquis par les actionnaires 12. Where an amount is included in the income of a resident shareholder pursuant to subsection 15(1) as a consequence of the acquisition of a capital property by him from a corporation, subsection 52(1) provides that such an amount is an addition to the cost to the shareholder of the property. Subsection 52( 1.1) contains the same rule in respect of a non-resident shareholder where the property acquired would, on disposition by the shareholder, be classed as taxable Canadian property. As the rules in subsections 52( 1) and 52(1.1) are only for the purpose of computing capital gains or capital losses, they are not applicable where the property acquired by the shareholder is inventory or eligible capital property, nor do they affect the amount of capital cost for the purposes of capital cost allowances. Also, they do not apply where ITAR 20( 1) or ITAR 26(5) applies to the transaction. 12. Lorsqu'un montant est inclus dans Ie revenu d'un actionnaire residant en vertu du paragraphe 15(1) par suite de l'acquisition de biens par lui d'une corporation, Ie paragraphe 52(1) stipule qu 'un tel montant s'ajoute au cout du bien pour I' actionnaire. Le paragraphe 52(1.1) contient la meme regie relativement it un actionnaire non residant Iorsque Ie bien acquis serait classe, lors de sa disposition par l'actionnaire, comme un bien canadien imposable. Les regles des paragraphes 52( 1) et 52( 1.1) n'existant qu 'aux fins du calcul des gains en capital ou des pertes en capital, elles ne s'appliquent pas lorsque Ie bien acquis par I'actionnaire est un bien figurant dans un inventaire ou un bien en immobilisations admissible. EUes n' affectent pas non plus Ie montant du cout en capital aux fins des deductions pour amortissement. En outre, eUes ne s'appliquent pas lorsque la RAIR 20(1) ou RAIR 26(5) s'applique a I'operation. 13. Where, however, the comments in IT-405, are applicable, the Department may permit an adjustment to the amount of the purchase price to reflect the amount deemed by paragraph 69(1)(b) to have been received by the corporation. 13. Lorsque, toutefois, Ies observations du IT-405 s'appliquent, Ie Ministere peut permettre un rajustement du prix d'achat pour refleter Ie montant repute par I' alinea 69( 1)b) avoir ete rec;u par Ia corporation. IT-432 4 Exchange of Properties Echange de biens 14. Another example of a transaction that would give rise )\n appropriation, within the meaning of that word in r •.ragraph 15(1 )(b), is where a corporation and a shareholder exchange property, whether by sale or otherwise, with the value of the property transferred by the corporation being greater than the value of the property received by it. The fair market values of the properties concerned must be determined at the date of the transaction. The value of the benefit to be included in the income of the shareholder is the amount by which the fair market value of the property transferred by the corporation exceeds the fair market value of the property received by the corporation. 14. Un autre exemple d'une operation qui entrainerait une attribution au sens qu'a cette expression dans I' alinea I5( l)b) est celle d'une corporation et d'un actionnaire qui echangent des biens, que ce soit par Ia vente ou autrement, la valeur du bien transfere'par Ia corporation etant plus grande que Ia valeur de bien re~u par elle. Les justes valeurs marchandes des biens concernes doivent etre determinees it la date de I'operation. La valeur de l' avantage it inclure dans Ie revenu de I' actionnaire est Ie montant de l' excedent de la juste valeur marchande du bien transfere sur la juste valeur marchande du bien reeru par la corporation. Funds Stolen or Embezzled by Shareholder Fonds voles ou detoumes par I'actionnaire 15. The words "in any manner whatever" as used in paragraph 15( I)(b) in relation to an appropriation of funds or property, are sufficiently wide to embrace a situation where funds or property of a corporation have been stolen or embezzled by a shareholder in his capacity as shareholder. Any amount fraudulently taken and retained by a shareholder, or diverted for his own use, is income under paragraph 15( I)(b) even though the corporation may recover part or all of its loss through a claim on an insurer. 15. L'expression «de quelque maniere que ce soit» telle qu'elle est utilisee dans l'alinea 15(l)b) relativement it une attribution de fonds ou de biens est suffisamment large pour englober une situation dans laquelle des fonds ou des biens d'une corporation auraient ete voles ou detournes par un actionnaire en sa qualite d'actionnaire. Tout montant frauduleusement pris et conserve . par un actionnaire,ou detourne pour son propre usage, est un revenu en vertu de I' alinea 15( I)b), meme si la corporation peut recouvrer une partieou la totalite de sa perte au moyen d'une demande de reglement aupres d'un assureur. Paragraph 15(1)(c) Alinea 15(1)c) 16. For the application of paragraph 15(1)(c) in the case ') the personal use of aircraft, see IT-160R and in the case <It interest-free or low interest loans, see IT-421. 16. En ce qui coneerne I'application de I' alim~a 15( I)c) dans Ie cas de I'usage personnel d'un aeronef, voir Ie IT-I60R et dans Ie cas de prets it interet reduit ou nul, voir Ie IT-421. Addition or Improvement to Shareholder's Building Ajout ou amelioration au batiment de I'actionnaire 17. A corporation that is renting a building owned by a shareholder may make an addition or improvement to the building. If, as is usual, such an addition or improvement vests in the owner ofthe building, a benefit is considered to have been conferred on the shareholder by the corporation pursuant to paragraph 15(1)(c). The amount of the benefit is considered to be the amount, if any, by which the addition or improvement increases the value of the building to the shareholder at the time the building reverts to.the shareholder. Therefore, in determining the amount of the benefit it is necessary to consider the particular facts of each case. The facts to be considered include the nature of the addition or improvement, the term of the lease, provisions for extension of the lease, provisions of the lease in respect to leasehold improvements and the amount of rent being charged. The benefit considered to be conferred in a particular taxation year is based upon the p<.'rtion of the addition or improvement completed during that year. 17. Une corporation qui loue un batiment appartenant it un actionnaire peut faire un ajout ou apporter une amelioration au batiment. Si, selon la coutume, un tel ajout ou amelioration revient au proprietaire du blitiment, un avantage est considere comme ayant ete· accorde it I' actionnaire par la corporation en vertu de I'alinea (l5)(l)c). Le montant de l'avantage est considere comme etant Ie montant, s'il en est, de I'augmentation qu' apporte l' ajout our amelioration it la valeur du batiment pour l'actionnaire au moment ou Ie blitiment revient it I'actionnaire. En consequence, pour determiner Ie montant de l' avantage, il est necessaire de considerer les faits particuliers a chaque cas. Les faits it prendre en consideration incluent la nature de I' ajout ou de I'amelioration, I'echeance du bail, les dispositions pour une extension du bail, les dispositions du bail relativement aux ameliorations de la propriete louee abail et Ie montant du loyer qui est demande. L'avantage considere comme ayant ete accorde dans une annee d' imposition particuliere repose sur la fraction de I'ajout ou de I'amelioration execute durant I'annee en cause. 18. In accordance with Regulation 1102(4), the cost to a corporation of making an addition or improvement to property leased from a shareholder. may be subject to J1pital cost allowance under either Regulation l100( 1)(b) ~6r Regulation 1102(5), depending on the circumstances, 18. Conformement au Reglement 1102(4), Ie cOllt, pour une corporation, d'un ajout ou d'une amelioration a un bien loue a bail it un actionnaire peut etre assujetti it une deduction pour amortissement en vertu de I'un ou de I'autre des Reglements ll00(1)b) et 1102(5), suivant les circonstances, et ceci n'est IT-432 4 Exchange of Properties Echange de biens 14. Another example of a transaction that would give rise to an appropriation, within the meaning of that word in paragraph 15( I )(b), is where a corporation and a shareholder exchange property, whether by sale or otherwise, with the value of the property transferred by the corporation being greater than the value of the property received by it. The fair market values of the properties concerned must be determined at the date of the transaction. The value of the benefit to be included in the income of the shareholder is the amount by which the fair market value of the property transferred by the corporation exceeds the fair market value of the property received by the corporation. 14. Un autre exemple d'une operation qui entrainerait une attribution au sens qu' a cette expression d~ns l' alinea 15( l)b) esT celIe d'une corporation et d'un actionnaire qui echangent des biens, que ce soit par la vente ou autrement. la valeur du bien transfere par la corporation etant plus grande que la valeur de bien r~u par eUe. Les justes valeurs marchandes des biens concemes doivent etre determinees a la date de l'operation. La valeur de I'avantage ainclure dans Ie revenu de I' actionnaire est Ie montant de l' excedent de la juste valeur marchande du bien transfere sur la juste valeur marchande du bien re~u par la corporation. Funds Stolen or Embezzled by Shareholder Fonds voles ou detoumes par I'actionnaire IS. The words "in any manner whatever" as used in paragraph 15( 1)(b) in relation to an appropriation of funds or property, are sufficiently wide to embrace a situation where funds or property of a corporation have been stolen or embezzled by a shareholder in his capacity as shareholder. Any amount fraudulc:ntly taken and retained by a shareholder, or diverted for his own use, is income under paragraph 15(1)(b) even though the corporation may recover part or all of its loss through a claim on an insurer. 15. L'expression «de quelque maniere que ce soit" telle qu'elle est utilisee dans l' alinea 15(1)b) relativement a une attribution de fonds ou de biens est suffisamment large pour englober une situation dans laqueUe des fonds ou des biens d'une corporation auraient ete voles ou detoumes par un actionnaire en sa qualite d'actionnaire.Tout montant frauduleusement pris et conserve par un actionnaire, ou detoume pour son propre usage, est un revenu en vertu de I' alinea 15( I)b), meme si la corporation peut recouvrer une partie ou la totalite de sa perle au moyen d'une demande de reglement aupres d' un assureur. Paragraph 15(1)(c) Alinea 15(1)c) 16. For the application of paragraph 15(1)(c) in the case of the personal use of aircraft. see IT-160R and in the case of interest-free or low interest loans, see IT-421. 16. En ce qui concerne l'application de l'alinea 15(1)c) dans Ie cas de I' usage personnel d' un aeronef, voir Ie IT-160R et dans 1" cas de prets a interet reduit au nul, voir Ie IT-421. ' Addition or Improvement to Shareholder's Building Ajout ou amelioration au batiment de I'actionnaire 17. A corporation that is renting a building owned by a shareholder may make an addition or improvement to the building. If, as is usual, such an addition or improvement vests in the owner of the building.. a benefit is considered to have been conferred on the shareholder by the corporation pursuant to paragraph 15(1)(c). The amount of the benefit is considered to be the amount, if any, by which the addition or improvement increases the value of the building to the shareholder at the time the building reverts to.the shareholder. Therefore. in determining the amount oCthe benefit it is necessary to consider the particular facts of each case. The facts to be considered include the nature of the addition or improvement, the term of the lease, provisions for extension of the lease. provisions of ,the lease in respect to leasehold improvements and the amount of rent being charged. The benefit considered to be conferred in a particular taxation year is based upon the pt'rtionof the addition or improvement completed during that year. 17. Une corporation qui loue un batiment appartenant a un actionnaire peut faire un ajout ou apporter une amelioration au batiment. Sit selon la coutume, un tel ajout ou amelioration revient au proprietaire du batiment, un avantage est considere comme ayant ete accorde a l' actionnaire par la corporation en vertu del'alinea (15)(1)c). Le montant de l'avantage est considere comme etant Ie montant.s'U en est. de l'augmentation qu' apporte I' ajout ou I' amelioration ala valeur du batiment pour l'actionnaire au moment ou Ie batiment revient a l'actionnaire. En consequence. pour determiner Ie montant de I' avantage, il est necessaire de considerer les faits particuliers a chaque cas .. Les faits 11 prendre en consideration incluent la nature de l' ajout ou de l'amelioration, l'echeance du bail. les dispositions pour une extension du bail, les dispositions du bail relativement aux am~liorations de la propriete louee abail et Ie montant du loyer qui est demande. L'avantage considere comme ayant ete accorde dans une annee d'imposition particuliere repose sur la fraction de l'ajout ou de l'amelioration execute durant l'annee en cause. 18, In accordance with Regulation 1102(4), the cost to a corporation of making an addition or improvement to property leased from a shareholder may be subject to capital cost allowance under either Regulation 1100( 1)(b) or RegUlation 1102(5), depending on the circumstances. 18, Conformement au Reglement 1l02(4), Ie cout, pour une corporation. d'un ajout ou d'une amelioration a un bien loue a bail a un actionnaire peut etre assujetti a une deduction pq amortissement en vertu de l'un ou de l'autre des Reglemen.._ llOO(l)b) et 1102(5), suivant les circonstances, et ceci n'est IT-432 5 and this is not affected by the application of subsection 15(1) to the shareholder. From the standpoint of the shareholder, the amount included in income under subsection 15( I) does not add to the capital cost of the property for purposes of capital cost allowances although, in accordance with subsections 52(1) and 52( 1.1), it is an addition to the cost of any capital property for the purpose of computing subsequent capital gains or capital losses. change en rien par I' application du paragraphe 15( 1) a I' actionnaire. Du point de vue de I'actionnaire, Ie montant indus dans Ie revenu en vertu du paragraphe 15(1) n' ajoute rien au cout en capital du bien aux fins des deductions pour amortissement bien que, conformement aux paragraphes 52( I ) et 52( 1.1), iI s' agisse d:une addition au cout de tout bien en immobilisations aux fins du calcul des gains en capital ou des pertes en capital subsequentes. Commitment by Corporation on Acquisition of Shares .by a Shareholder Engagement par la corporation lors de I'acquisition d'actions par un actionnaire 19. Where one shareholder acquires the shares of another shareholder in a particular corporation and a commitment by that corporation to pay consulting fees or to make other payments to the ex-shareholder for future services is, in fact, part of the consideration for the shares sold, the Department will consider such a commitment to be an appropriation of property of the corporation for the benefit of the shareholder acquiring the shares in the year when the commitment was made. Where the payments by the corporation to the ex-shareholder must be made whether or not the ex-shareholder renders any services to the corporation is one indication that such a commitment is, in fact, part of the consideration for the shares sold. 19. Lorsqu'un actionnaire acquiert les actions d'un autre actionnaire dans une corporation particuliC~re et qu' un engagement par cette corporation de payer des honoraires d'expert-conseil ou de faire d'autres paiements I'ancien actionnaire pour des services futurs fait effectivement partie de la contrepartie pour les actions vendues, Ie Ministere considere qu'un tel engagement est une attribution de biens de la corporation ai' actionnaire qui acquiert les actions dans l'annee ou I'engagement est pris. Lorsque les paiements par la corporation 11 I' ancien actionnaire doivent etre faits independamment de la question de savoir si I'ancien actionnaire rend des services 11 la corporation, cela constitue une indication qu 'un tel engagement est, en fait, une partie de la contrepartie pour les actions vendues. Co-operative Apartments Appartements cooperatifs 20. A number of individuals may form a corporation for the purpose of having the corporation own an apartment block. Each shareholder becomes entitled to occupy a specific suite in the apartment block. Generally, monthly service rates charged by the corporation to the sharehold· ers are calculated so as to defray as nearly as possible the estimated cost of financing and operating the building. The intention of this arrangement is that the corporation does not have a profit or loss and the shareholders receive accommodation at actual cost. In these circumstances, while the shareholders are charged less by the corporation than the fair market rent, subsection 15(1) is not considered applicable to the shareholders nor is paragraph 69( 1)(b) considered applicable to the corporation. The foregoing view may not be taken if the corporation accumulates surplus funds and the income earned thereon is used to pay part of the operating costs of the building. 20. Un certain nombre de particuliers peuvent former une corporation pour que la corporation detienne un immeuble appartements. Chaque actionnaire acquiert Ie droit d'occuper un appartement precis dans l'immeuble 11 ·appartements. En general, les tarifs des services mensuels demandes par la corporation aux actionnaires sont calcules de maniere 11 defrayer au plUs pres possible Ie cout estimatif de financement et d'exploitation de l'immeuble. L' intention d' un tel arrangement est que la corporation ne fasse pas de profits ou de pertes et que les actionnaires re~oivent un logement au cout reel. Dans de telles circonstances, bien que les actionnaires se voient demander moins par la corporation que Ie juste loyer marchand, Ie paragraphe 15(1) n'est-pas considere comme s'appliquant aux actionnaires et l' alinea 69(1)b) n' est pas considere comme s' appliquant 11 la corporation. Le point de vue qui precede ne peut pas entrer en ligne de compte si la corporation accumule des fonds en surplus et si Ie revenu gagne y afferent est utilise pour payer une partie des frais d'exploitation de l'immeuble. a a