UBC Theses and Dissertations

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UBC Theses and Dissertations

The capital gains taxation of corporations and shareholders in the United Kingdom and Canada Attewell, Nicholas Charles


The subject of this thesis is a comparison of the tax consequences in the UK and Canada of capital gains and losses realised by corporations, and by shareholders on their shares. The comparison is made with reference to certain principles derived from the recent report in Canada of the Royal Commission on Taxation. One of the basic axioms underlying the Commission's reccommendations was that the form in which a business is carried on or property is held should be neutral in its tax consequences. Two principles are extracted from this axiom, upon which the discussions in this thesis are based. The first principle requires that the taxation of corporations and their shareholders be integrated, so that no more taxes are paid on capital gains or other income accruing to a corporation than would have been paid had they accrued directly to an individual. In fact, discussion of the dividend tax credit given to individual shareholders and the right given to corporations to deduct certain dividends received from their income reveals a general position in both systems of partial integration only, with a fuller degree of integration being given by virtue of special provisions to private corporations in Canada and to certain investment companies in both systems. However, both systems are distorted by certain factors. On the one hand, the flat rate of tax paid by corporations induces individual, shareholders paying higher personal rates of Income Tax to cause the corporation to accumulate, rather than to distribute, its earnings. On the other hand, the lower rate of tax paid by all taxpayers on capital gains as opposed to other income causes the same shareholders to obtain their share of such accumulations in a manner which results in a capital gain in their hands and not ordinary income. This may be done either by virtue of a sale of the members’ shares or by obtaining a distribution from the corporation in capital form. Both systems have numerous provisions to discourage corporations from accumulating income and to convert what would otherwise be capital receipts in shareholders’ hands into income receipts. The result is to severely curtail the opportunities for tax avoidance through manipulating the form in which corporate surpluses are distributed. The second principle holds that there should be no tax payable on a capital gain when it results from a disposal which has only made a change in the legal form in which an asset is held and has made no change in its underlying beneficial ownership. This principle is recognised in both systems by many provisions which grant a deferral of tax on capital gains where an individual transfers assets to a corporation in return for shares, where a corporation transfers assets to another corporation which is controlled by it or directly or indirectly by another corporation which also controls the transferor (whether the transfer accompanies a corporate amalgamation or reconstruction or not) or where a shareholder's holding in a company is converted into another holding as the result of a corporate reconstruction or amalgamation or a conversion right attached to the shares. However, some equally obvious situations are not recognized in the same way, e.g. transfer of assets by a corporation to its controlling individual shareholder, so that it must be concluded that the statutes are somewhat selective in their application of this principle. Although this thesis is primarily concerned with corporations and their shareholders, it also deals with mutual fund trusts and unit trusts and their unit holders in the same fashion. The justification for this is the similarity of the function and tax treatment of these trusts to certain investment companies found in both systems.

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