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Doug Saunders believes this will permit the Company to
avoid the Canadian withholding tax since the transfer
of funds to the U.S. should not constitute a dividend
for Canadian tax purposes. Whereas, the U.S. tax laws
rely more on substance, the Canadian tax laws rely
heavily on form.
Sometime after June 15, 1993, and before June 28, 1993, Mr.
Bond prepared a memorandum to petitioner’s tax file (Mr. Bond’s
draft June 1993 file memorandum).8 Mr. Bond’s draft June 1993
file memorandum, which was not finalized until July 9, 1993,
stated in pertinent part:
During the fiscal year ending June 30, 1993, Canada
[ITC] will pay a dividend to ITI [petitioner]. It may
be possible to avoid Canadian withholding tax on the
dividend if the paid-up capital of Canada can be in-
creased prior to the payment of the dividend. In order
to increase Canada’s paid-up capital before paying the
dividend the transaction will be accomplished according
to the following steps:
1. Canada will repay the loan from ITI.
2. ITI will recontribute the cash to Canada.
3. Canada will pay the dividend.
4. ITI will make a new loan to Canada.
* * * * * * *
CONCLUSIONS
1. The various steps involved in the transaction
should be respected for U.S. tax purposes. How-
ever, it will be beneficial to spread the steps
over time and vary the amounts involved in each
step.
8Mr. Saunders did not review Mr. Bond’s draft June 1993 file
memorandum prior to the trial in this case.
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