25 May 2006 Roundtable, 2006-0192291C6 - Application of paragraph 256(1.4)(a)

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Whether the comments in the case of Sedona Networks Corporation, 2006 TCC, will affect our position that, where several persons have a right described in paragraph 256(1.4)(a) to acquire the shares owned by the other shareholders, control of the corporation is determined as though the rights are exercised simultaneously?

Position: No.

Reasons: Sedona decision is not inconsistent with our position.

2006 Institute of Chartered Accountants of Alberta CRA Roundtable
May 25, 2006

Question 14:

In an April 20, 2005 CRA Technical Interpretation (2005-0119901E5), CRA appears to apply paragraph 256(1.4)(a) as a "simultaneous exercise" with respect to rights of shareholders to acquire newly issued shares of a corporation ("Stock Options"), but not with respect to rights of shareholders to acquire from one another already issued shares of the corporation ("Shareholder Agreement Rights"). Therefore, it appears that CRA feels that Shareholder Agreement Rights in respect of OPCO where the shares are owned by Mr. A and Mr. B may associate OPCO with Mr. A's corporation and Mr. B's corporation if there are provisions in the Agreement that permit an acquisition other than on bankruptcy, permanent disability, death, right of first refusal, or a shotgun provision. What is CRA's interpretation of the application of paragraph 256(1.4)(a) to Shareholder Agreement Rights considering the comments in the Sedona Network Corporation case? (March 2, 2006 decision of the Tax Court of Canada, 2006 TCC 80)? (Note that three other recent Technical Interpretations have discussed this issue - 2005-0121951E5, 2004-008676 and 2003-0048571C6).

CRA Response:

For the purposes of determining whether a corporation is associated with another corporation, with which it is not otherwise associated, in a situation where several persons have a right described in paragraph 256(1.4)(a), the CRA has taken the view that "control" of the corporation must be determined as though the rights are exercised simultaneously in determining the number of shares deemed to be owned by a particular person and the number of shares of the corporation that are deemed to be issued and outstanding. The rationale for this position is that, under the provisions of paragraph 256(1.4)(a), the holder of the rights is deemed to own the shares and the shares are deemed to be issued and outstanding at the time of the determination. This position applies regardless of whether the rights are Stock Options or Shareholder Agreement Rights. The difference between the two situations is that a Stock Option will increase the number of shares of the corporation that are deemed to be issued and outstanding whereas a Shareholder Agreement Right will not increase the number of shares that are deemed to be issued and outstanding. We do not think that the comments in the Sedona case will affect our stated position.