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

Full Document:  

Act current to 2019-06-20 and last amended on 2019-06-17. Previous Versions

PART XIIITax on Income from Canada of Non-resident Persons (continued)

Marginal note:Non-arm’s length sales of shares by non-residents

  •  (1) Subsection (1.1) applies if a 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, and if section 186 were read without reference to its subsection (6)) with the purchaser corporation.

  • Marginal note:Non-arm’s length sales of shares by non-residents

    (1.1) If this subsection applies,

    • (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 referred to in subsection (1) 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

      • (i) in the case that, immediately before the disposition, the purchaser corporation controlled the non-resident person,

        • (A) paid at the time of the disposition by the subject corporation to the non-resident person, and

        • (B) received at that time by the non-resident person from the subject corporation, and

      • (ii) in any other case,

        • (A) paid at the time of the disposition by the purchaser corporation to the non-resident person, and

        • (B) 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:Deemed consideration

    (1.2) For the purposes of subsections (1) and (1.1), if, in the absence of this subsection, no consideration would be received by the non-resident person referred to in subsection (1) from the purchaser corporation for the subject shares, the non-resident person is deemed to receive consideration other than shares of the capital stock of the purchaser corporation from the purchaser corporation for the subject shares, the fair market value of which is equal to the amount, if any, by which the fair market value of the subject shares disposed of by the non-resident person exceeds the amount of any increase because of the disposition in the fair market value of the 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 (1.1)(b), and

    • (b) the total of all amounts each of which is an amount required by paragraph (1.1)(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) a non-resident person shall, for greater certainty, be deemed not to deal at arm’s length with a purchaser corporation at the time of a disposition described in subsection (1) 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 non-resident person referred to in paragraph (a) was a member of a group of less than six persons that controlled a corporation at any time, any shares of the capital stock of that corporation owned at that time by any of the following persons shall be deemed to be owned at that time by the non-resident person and not by the person who actually owned the shares at that time:

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

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

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

      • (iv) a partnership of which the non-resident person 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));

    • (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; and

    • (e) [Repealed, 2018, c. 27, s. 21]

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

  • Marginal note:Where section does not apply

    (4) Notwithstanding subsection (1), subsection (1.1) does not apply in respect of a disposition by a non-resident corporation of shares of a subject corporation to a purchaser corporation if

    • (a) immediately before the disposition, the purchaser corporation controlled the non-resident corporation; and

    • (b) it is not the case that, at the time of the disposition, or as part of a transaction or event or series of transactions or events that includes the disposition, a non-resident person

      • (i) holds, directly or indirectly, shares of the capital stock of the purchaser corporation, and

      • (ii) does not deal at arm’s length with the purchaser corporation.

  • Marginal note:Tiered trusts and partnerships

    (5) For the purposes of this section and paragraph (k) of the definition proceeds of disposition in section 54, a person or partnership that is, at any time, a beneficiary under a trust (other than a trust that is the non-resident person referred to in subsection (1)), or a member of a partnership (such trust or partnership referred to in this subsection as the “particular conduit”), that is a beneficiary under a trust or member of a partnership (such trust or partnership referred to in this subsection as the “other conduit”) is deemed

    • (a) to be a beneficiary under or member of, as the case may be, the other conduit; and

    • (b) to hold the interest in the other conduit that is held by the particular conduit in the proportion expressed by the formula

      A/B

      where

      A
      is the portion of the fair market value, at that time, of the person or partnership’s interest in the particular conduit that is attributable to the interest in the other conduit held by the particular conduit, and
      B
      is the total fair market value, at that time, of all direct interests (determined without reference to this subsection) in the other conduit.
  • Marginal note:Trusts and partnerships look-through rule

    (6) The following rules apply for the following purposes:

    • (a) for the purposes of this subsection and subsections (1) and (1.1), if at any time an interest (in this paragraph referred to as the “pertinent interest”) in a trust or a partnership (each referred to in this subsection as a “conduit”) is disposed of by a person or partnership with an interest as a beneficiary under the conduit or that is a member of the conduit (each referred to in this subsection as a “holder”), as the case may be, to a purchaser and any portion of the fair market value of the pertinent interest is attributable to shares of the capital stock of a corporation resident in Canada held, directly or indirectly (unless all of the shares are held indirectly through one or more non-resident corporations), by the conduit (in this paragraph referred to as the “shares held by the conduit”), then

      • (i) the holder is deemed, on a class-by-class basis, to have disposed, at that time, of the shares held by the conduit to the purchaser, and the purchaser is deemed to have acquired the shares, in the proportion expressed by the formula

        A/B

        where

        A
        is the portion of the fair market value, at that time, of the pertinent interest that is attributable to the shares held by the conduit, and
        B
        is the total fair market value, at that time, of the shares held by the conduit, and
      • (ii) the holder is deemed to have received from the purchaser and the purchaser is deemed to have paid to the holder, as consideration for the shares deemed to have been disposed of in subparagraph (i), consideration (other than any share of the capital stock of the purchaser corporation) in an amount determined by the formula

        A × B/C

        where

        A
        is the fair market value of the consideration (other than any share of the capital stock of the purchaser corporation) that is received by the holder from the purchaser for the pertinent interest,
        B
        is the amount determined for A in subparagraph (i), and
        C
        is the total fair market value of the pertinent interest;
    • (b) for the purposes of subsections (1) and (1.1) and paragraph (c), if at any time a conduit (other than a non-resident trust) disposes of shares of the capital stock of a corporation resident in Canada to a purchaser, then

      • (i) each holder of an interest in the conduit is deemed, on a class-by-class basis, to have disposed, at that time, of the shares to the purchaser in the proportion expressed by the formula

        A/B

        where

        A
        is the fair market value, at that time, of the holder’s interest in the conduit, and
        B
        is the total fair market value, at that time, of all direct interests (determined without reference to subsection (5)) in the conduit, and
      • (ii) each holder of an interest in the conduit is deemed to have received from the purchaser and the purchaser is deemed to have paid to each such holder, as consideration for the shares deemed to have been disposed of in subparagraph (i), consideration (other than any share of the capital stock of the purchaser corporation) in an amount determined by the formula

        A × B/C

        where

        A
        is the fair market value of the consideration (other than any share of the capital stock of the purchaser corporation) that is received by the conduit from the purchaser for the shares,
        B
        is the amount determined for A in subparagraph (i), and
        C
        is the amount determined for B in subparagraph (i);
    • (c) for the purposes of subsections (1) and (1.1), if at any time a conduit acquires shares of the capital stock of a corporation resident in Canada from a vendor, then

      • (i) each holder of an interest in the conduit is deemed to have acquired, at that time, the shares from the vendor, on a class-by-class basis, in the proportion expressed by the formula

        A/B

        where

        A
        is the fair market value, at that time, of the holder’s interest in the conduit, and
        B
        is the total fair market value, at that time, of all direct interests (determined without reference to subsection (5)) in the conduit, and
      • (ii) each holder of an interest in the conduit is deemed to have paid to the vendor and the vendor is deemed to have received from each such holder, as consideration for the shares deemed to have been acquired in subparagraph (i), consideration (other than any share of the capital stock of the purchaser corporation) in an amount determined by the formula

        A × B/C

        where

        A
        is the fair market value of the consideration (other than any share of the capital stock of the purchaser corporation) that is paid by the conduit to the vendor for the shares,
        B
        is the amount determined for A in subparagraph (i), and
        C
        is the amount determined for B in subparagraph (i); and
    • (d) for the purpose of determining whether the subject corporation is connected with the purchaser corporation for the purposes of subsection (1) at any time, if at that time a conduit owns shares of the capital stock of the subject corporation, each holder of an interest in the conduit is deemed to own, at that time, the shares of each class of the capital stock of the subject corporation that are owned by the conduit the number of which is determined by the formula

      A × B/C

      where

      A
      is the total number of shares of the class of the capital stock of the subject corporation that are owned by the conduit at that time,
      B
      is the fair market value, at that time, of the holder’s interest in the conduit, and
      C
      is the total fair market value, at that time, of all direct interests (determined without reference to subsection (5)) in the conduit.
  • Marginal note:Avoidance of subsections (5) and (6)

    (7) The amounts determined for A and B in paragraph (5)(b), for A and B in subparagraph (6)(c)(i) and for B and C in paragraph (6)(d) are, in respect of an interest as a beneficiary under a trust held by a person or partnership, deemed to be equal to one if

    • (a) the person or partnership’s share of the accumulating income or capital of the trust depends on the exercise by any person of, or the failure by any person to exercise, any discretionary power; and

    • (b) it can reasonably be considered that one of the reasons for the discretionary power is to avoid or limit the application of subsection (1.1).

  • [NOTE: Application provisions are not included in the consolidated text
  • see relevant amending Acts and regulations.]
  • 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
  • 2016, c. 12, s. 58
  • 2018, c. 27, s. 21
 
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