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.
Principal Issues:
Will 85(1)(e.2) apply where there is a restricted retraction right?
Position TAKEN:
yes.
Reasons FOR POSITION TAKEN:
retraction feature is an important determinant of fair market value.
5-950055
XXXXXXXXXX D. Yuen
Attention: XXXXXXXXXX
February 2, 1995
Dear Sirs:
Re: Paragraph 85(1)(e.2) of the Income Tax Act1
We are writing in response to your letter of December 15, 1994 wherein you have requested our views on the application of paragraph 85(1)(e.2) in a situation where common shares are converted into preferred shares having a restricted retraction right and an election under subsection 85(1) is filed in respect of the conversion.
It is your view that paragraph 85(1)(e.2) will not be applicable since the transaction will occur at fair market value; the value of the preferred shares is not discounted by the restricted retraction right and no benefits are conferred on any new common shareholders who may be related to the preferred shareholders.
Our views
As indicated in subparagraph 14(f) of Information Circular 70-6R2 dated September 28, 1990 issued by Revenue Canada ("IC 70-6R2"), we are unable to provide comments on the determination of fair market value. However, it is our view that the retraction feature is an important characteristic in the determination of fair market value of preferred shares and any restriction thereon would have an impact on such determination.
The foregoing comments are given in accordance with the practice referred to in paragraph 21 of IC 70-6R2 and are not binding on Revenue Canada.
Yours truly,
for Director
Reorganizations and Foreign Division
Rulings Directorate
Policy and Legislation Branch
1 All statutory references in this letter are to the Income Tax Act (Canada) R.S.C. 1985 (5th Supp.), c. 1, as amended.
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