Income Tax Act

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

• 212.1 (1) Subsection (1.1) applies if a non-resident person or designated partnership (in this subsection and subsections (1.1) and (1.2) 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.

• 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 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 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 or designated partnership 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 or designated partnership 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 or designated partnership (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), 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 or designated partnership

    • (i) owns, 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.