20 December 1996 External T.I. 9528615 - VALIDITY OF SHARE ISSUE WRITER NOT AUTHORIZED

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.

Please note that the following document, although believed
to be correct at the time of issue, may not represent the
current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis,

peut ne pas représenter la position actuelle du ministère.

5-952861
XXXXXXXXXX D.A. Palamar

Attention: XXXXXXXXXX

January 3, 1997

Dear Sir:

Re: Technical Interpretation Request - Validity of Share Issue

This is in response to the above-captioned request wherein you asked us for our opinion in respect of the fact situation described below.

Company A is incorporated in 1990. It decides to amend its share structure and this is done internally within the corporation by resolution and the issue of share certificates on June 15, 1991.

Articles of Amendment in respect of the change in share structure are not filed with the Director of the Corporations Branch, as required by subsection 171 of the Ontario Business Corporations Act (the "OBCA"), until December 1991.

You have requested our views as to whether we would consider the payment of dividends by Company A in June of 1991 to be valid.

Your question would appear to relate to a completed transaction involving an identifiable taxpayer. As such, it is subject to review by the Taxation Services Office having responsibility for the area in which the taxpayer resides.

We can, however, provide you with the following general comments.

Section 273 of the OBCA, inter alia, deals with the effective date of Articles of Amendment. That section does not contain any provisions which would make Articles of Amendment effective prior to their receipt by the Director of the Corporations Branch.

In the case of Dale v. The Queen 94 DTC 1101 (T.C.C.) the Court had to consider whether a capital dividend paid on a class of preferred shares was effective for purposes of the Income Tax Act (the "Act"). The necessary shareholders' and directors' resolutions creating and issuing the preferred shares and declaring the dividends had been passed. The company had, however, neglected to obtain supplementary letters patent authorizing the creation and issuance of the preferred shares. The company eventually obtained a court order which purported to retroactively authorize the necessary changes to the company's capital.

In finding that the capital dividend in question was not validly paid Judge Bowman made the following comment at page 1111:

For dividends to be payable on a class of shares at a particular time all steps necessary for the valid issuance of the shares must have in fact and in law have been completed at that time. Dividends cannot become payable on embryonic shares.

Accordingly, in our view, dividends paid on shares not validly issued would not be valid for purposes of the Act.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch