Income Tax Act (R.S.C., 1985, c. 1 (5th Supp.))

Act current to 2016-08-15 and last amended on 2016-07-01. Previous Versions

Marginal note:Non-arm’s length sales of shares by non-residents
  •  (1) If a non-resident person, a designated partnership or a non-resident-owned investment corporation (in this section referred to as the “non-resident person”) disposes of shares (in this section referred to as the “subject shares”) of any class of the capital stock of a corporation resident in Canada (in this section referred to as the “subject corporation”) to another corporation resident in Canada (in this section referred to as the “purchaser corporation”) with which the non-resident person does not (otherwise than because of a right referred to in paragraph 251(5)(b)) deal at arm’s length and, immediately after the disposition, the subject corporation is connected (within the meaning that would be assigned by subsection 186(4) if the references in that subsection to “payer corporation” and “particular corporation” were read as “subject corporation” and “purchaser corporation”, respectively) with the purchaser corporation,

    • (a) the amount, if any, by which the fair market value of any consideration (other than any share of the capital stock of the purchaser corporation) received by the non-resident person from the purchaser corporation for the subject shares exceeds the paid-up capital in respect of the subject shares immediately before the disposition shall, for the purposes of this Act, be deemed to be a dividend paid at the time of the disposition by the purchaser corporation to the non-resident person and received at that time by the non-resident person from the purchaser corporation; and

    • (b) in computing the paid-up capital at any particular time after March 31, 1977 of any particular class of shares of the capital stock of the purchaser corporation, there shall be deducted that proportion of the amount, if any, by which the increase, if any, by virtue of the disposition, in the paid-up capital, computed without reference to this section as it applies to the disposition, in respect of all of the shares of the capital stock of the purchaser corporation exceeds the amount, if any, by which

      • (i) the paid-up capital in respect of the subject shares immediately before the disposition

      exceeds

      • (ii) the fair market value of the consideration described in paragraph (a),

      that the increase, if any, by virtue of the disposition, in the paid-up capital, computed without reference to this section as it applies to the disposition, in respect of the particular class of shares is of the increase, if any, by virtue of the disposition, in the paid-up capital, computed without reference to this section as it applies to the disposition, in respect of all of the issued shares of the capital stock of the purchaser corporation.

  • Marginal note:Idem

    (2) In computing the paid-up capital at any particular time after March 31, 1977 of any particular class of shares of the capital stock of a corporation, there shall be added an amount equal to the lesser of

    • (a) the amount, if any, by which

      • (i) the total of all amounts each of which is an amount deemed by subsection 84(3), 84(4) or 84(4.1) to be a dividend on shares of the particular class paid after March 31, 1977 and before the particular time by the corporation and received by a non-resident-owned investment corporation or by a person who is not a corporation resident in Canada

      exceeds

      • (ii) the total that would be determined under subparagraph (i) if this Act were read without reference to paragraph (1)(b), and

    • (b) the total of all amounts each of which is an amount required by paragraph (1)(b) to be deducted in computing the paid-up capital in respect of the particular class of shares after March 31, 1977 and before the particular time.

  • Marginal note:Idem

    (3) For the purposes of this section,

    • (a) in respect of any disposition described in subsection (1) by a non-resident person of shares of the capital stock of a subject corporation to a purchaser corporation, the non-resident person shall, for greater certainty, be deemed not to deal at arm’s length with the purchaser corporation if the non-resident person was,

      • (i) immediately before the disposition, one of a group of less than 6 persons that controlled the subject corporation, and

      • (ii) immediately after the disposition, one of a group of less than 6 persons that controlled the purchaser corporation, each member of which was a member of the group referred to in subparagraph (i);

    • (b) for the purposes of determining whether or not a particular non-resident person (in this paragraph referred to as the “taxpayer”) referred to in paragraph (a) was a member of a group of less than 6 persons that controlled a corporation at any time, any shares of the capital stock of that corporation owned at that time by

      • (i) the taxpayer’s child (within the meaning assigned by subsection 70(10)), who is under 18 years of age, or the taxpayer’s spouse or common-law partner,

      • (ii) a trust of which the taxpayer, a person described in subparagraph (i) or a corporation described in subparagraph (iii) is a beneficiary,

      • (iii) a corporation controlled by the taxpayer, a person described in subparagraph (i), a trust described in subparagraph (ii) or any combination thereof, or

      • (iv) a partnership of which the taxpayer or a person described in one of subparagraphs (i) to (iii) is a majority-interest partner or a member of a majority-interest group of partners (as defined in subsection 251.1(3))

      shall be deemed to be owned at that time by the taxpayer and not by the person who actually owned the shares at that time;

    • (c) a trust and a beneficiary of the trust or a person related to a beneficiary of the trust shall be deemed not to deal with each other at arm’s length;

    • (d) for the purpose of paragraph (a),

      • (i) a group of persons in respect of a corporation means any 2 or more persons each of whom owns shares of the capital stock of the corporation,

      • (ii) a corporation that is controlled by one or more members of a particular group of persons in respect of that corporation shall be considered to be controlled by that group of persons, and

      • (iii) a corporation may be controlled by a person or a particular group of persons notwithstanding that the corporation is also controlled or deemed to be controlled by another person or group of persons;

    • (e) a designated partnership means a partnership of which either a majority-interest partner or every member of a majority-interest group of partners (as defined in subsection 251.1(3)) is a non-resident person; and

    • (f) in this subsection, a person includes a partnership.

  • Marginal note:Where section does not apply

    (4) Notwithstanding subsection (1), this section does not apply in respect of a disposition by a non-resident corporation of shares of a subject corporation to a purchaser corporation that immediately before the disposition controlled the non-resident corporation.

  • NOTE: Application provisions are not included in the consolidated text;
  • see relevant amending Acts. R.S., 1985, c. 1 (5th Supp.), s. 212.1;
  • 1994, c. 7, Sch. II, s. 175, Sch. VIII, s. 124;
  • 1999, c. 22, s. 76;
  • 2000, c. 12, s. 142;
  • 2013, c. 40, s. 82.
Marginal note:Application
  •  (1) This section applies where

    • (a) a taxpayer disposes at a particular time of a share of the capital stock of a corporation resident in Canada (or any property more than 10% of the fair market value of which can be attributed to shares of the capital stock of corporations resident in Canada) to

      • (i) a person resident in Canada,

      • (ii) a partnership in which any person resident in Canada has, directly or indirectly, an interest, or

      • (iii) a person or partnership that acquires the share or the property in the course of carrying on a business through a permanent establishment in Canada, as defined in the Income Tax Regulations;

    • (b) subsection 212.1(1) does not apply to the disposition;

    • (c) the taxpayer is non-resident at the particular time;

    • (d) it is reasonable to conclude that the disposition is part of an expected series of transactions or events that includes the issue after December 15, 1998 of a particular share of the capital stock of a particular insurance corporation resident in Canada on the demutualization (within the meaning assigned by subsection 139.1(1)) of the particular corporation and

      • (i) after the particular time, the redemption, acquisition or cancellation of the particular share, or a share substituted for the particular share, by the particular corporation or the issuer of the substituted share, as the case may be,

      • (ii) after the particular time, an increase in the level of dividends declared or paid on the particular share or a share substituted for the particular share, or

      • (iii) the acquisition, at or after the particular time, of the particular share or a share substituted for the particular share by

        • (A) a person not dealing at arm’s length with the particular corporation or with the issuer of the substituted share, as the case may be, or

        • (B) a partnership any direct or indirect interest in which is held by a person not dealing at arm’s length with the particular corporation or with the issuer of the substituted share, as the case may be; and

    • (e) at the particular time, the person described in subparagraph (a)(i) or (iii) or any person who has, directly or indirectly, an interest in the partnership described in subparagraph (a)(ii) or (iii) knew, or ought reasonably to have known, of the expected series of transactions or events described in paragraph (d).

  • Marginal note:Deemed dividend

    (2) For the purposes of this Part, where property is disposed of at any time by a taxpayer to a person or partnership in circumstances in which this section applies,

    • (a) a taxable dividend is deemed to be paid at that time by the person or partnership to the taxpayer and received at the time by the taxpayer;

    • (b) the amount of the dividend is deemed to be equal to the amount determined by the formula

      A - ((A/B) × C)

      where

      A 
      is the portion of the proceeds of disposition of the property that can reasonably be attributed to the fair market value of shares of a class of the capital stock of a corporation resident in Canada,
      B 
      is the fair market value immediately before that time of shares of that class, and
      C 
      is the paid-up capital immediately before that time of that class of shares; and
    • (c) in respect of the dividend, the person or partnership is deemed to be a corporation resident in Canada.

  • NOTE: Application provisions are not included in the consolidated text;
  • see relevant amending Acts. 2000, c. 19, s. 64.
 
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