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: Would the amendment of a shareholders’ agreement to allow a surviving spouse to retain ownership of shares for the same period that the deceased spouse could have held them be considered to have vested indefeasibly for the purposes of subsection 70(6)?
Position: Yes, in this particular case.
Reasons: The surviving spouse would have the same rights as the deceased spouse and the amendment is not to restrict the surviving spouse’s rights after death.
XXXXXXXXXX
XXXXXXXXXX 982716
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 1998
Dear Sirs:
Re: Revised Advance Income Tax Ruling
XXXXXXXXXX
This is in reply to your letters dated XXXXXXXXXX, wherein you requested revisions to advance income tax ruling #3-980304 that was provided to the above-noted taxpayer. We also acknowledge the information provided during our various telephone conversations (XXXXXXXXXX).
This letter cancels and replaces our ruling letter of XXXXXXXXXX, 1998.
Our understanding of the facts and proposed transactions is as follows:
Facts
1. The Company is a corporation resident in Canada with its head office at XXXXXXXXXX. The Company's Business Number is XXXXXXXXXX. The Company files its tax returns at the XXXXXXXXXX Taxation Centre and its head office is within the area served by the XXXXXXXXXX Taxation Services Office.
2.
XXXXXXXXXX
3. The Company's share capital consists of Class A and Class B shares and the shares are not qualified for distribution to the public. The Company has XXXXXXXXXX shareholders, with the largest shareholding being XXXXXXXXXX% of the outstanding shares. The Company and each of its shareholders have entered into an agreement (the "Shareholders' Agreement") that restricts the transfer of shares and requires the sale of shares by a shareholder on the occurrence of certain events. The Class A and Class B shares are equal in all respects. The sole purpose for having the Class B shares is to identify the shares that are subject to certain rights as described in subparagraph 4(f) below.
All of the shareholders are employees of the Company (the "Participating Employee") or a person affiliated to a Participating Employee of the Company (an "Affiliate"). All Participating Employees deal at arm's length with the Company and with each other. An Affiliate is defined in the Shareholders' Agreement to be the spouse of the Participating Employee; a corporation controlled by the Participating Employee or by the Participating Employee's spouse, child or children; a trust for the benefit of the Participating Employee's spouse, child or children; or a corporation controlled by a corporation controlled by an Affiliate. An Affiliate of a Participating Employee that owns shares of the Company will hereinafter be referred to as an "Affiliated Shareholder". An employee or Affiliate cannot own shares of the Company until that person has entered into the Shareholders' Agreement
4. The Shareholders' Agreement includes the following provisions:
(a) The legal representative of a Participating Employee who dies is required to sell the employee's shares to the other shareholders in the manner directed by the Company's Board of Directors.
(b) If a Participating Employee retires or terminates employment, the other shareholders have the right to require the Participating Employee to sell his or her shares to them or the Company as directed by the Company's Board of Directors.
(c) The obligation to sell shares on death, retirement or termination of employment of a Participating Employee also applies to his or her Affiliated Shareholders.
(d) The Company's Board of Directors may determine, in the best interests of the Company, that a Participating Employee or his or her Affiliated Shareholders sell a certain number of shares of the Company (the "Designated Shares") to specific other Participating Employees or their Affiliates (each referred to as a "Designated Purchaser"). If the Designated Purchaser does not purchase all of the Designated Shares that are made available to him or her then the other shareholders (excluding the Designated Purchaser) will purchase a pro rata share of the remaining Designated Shares.
(e) Schedule A of the Shareholders' Agreement sets out the method for determining the sale price for shares.
(f) A shareholder who has sold shares has the right to reacquire those shares, for a limited period, at a specified price if the Company is subsequently taken over. For shares sold on or after XXXXXXXXXX, this right lasts for XXXXXXXXXX years. For shares sold before that date, the right lasts for XXXXXXXXXX years. The shares that are subject to such rights are the Class B shares.
5. The Company pays base salaries and bonuses to its Participating Employees. Bonuses constitute a substantial portion of a Participating Employee's remuneration, and may be several times the base salary. Bonuses are paid quarterly. Each Participating Employee's percentage share of the quarterly bonus pool (the "Bonus Allocation Percentage") is established annually. This same percentage is also the percentage of the Company's shares that the Participating Employee and his or her Affiliated Shareholders are entitled to own. Shares are bought and sold each year in accordance with the requirements described in 4(d) above to adjust shareholdings to the Bonus Allocation Percentages.
Proposed Transactions
6. It is proposed that the Company's Memorandum and Articles be amended to create a new class of shares, to be called Class C shares, with the following rights and restrictions:
(a) The Class C shares will be non-voting, except as noted below.
(b) Dividends may be paid on the Class C shares to the exclusion of any other class of shares. The Company will be required to pay dividends on the Class C shares in accordance with the Supplementary Shareholders' Agreement (defined in paragraph 8 below) (refer to subparagraph 8(a) below for the requirement to pay dividends).
(c) The Class C shareholders will have the right to elect a majority of the Company's directors in certain circumstances as provided by the Supplementary Shareholders' Agreement (refer to subparagraph 8(f) below).
(d) Class A shares will be convertible into Class C shares, and Class C shares will be convertible into Class A shares. The conversion rights and obligations will be those specified in the Shareholders' Agreement and the Supplementary Shareholders' Agreement (refer to subparagraphs 7(e) and 8(c), respectively).
(e) In all other respects, the Class C shares will be the same as the Class A shares.
7. The Shareholders' Agreement will be amended as follows:
(a) All Class B shares will be required to be converted to Class A shares.
(b) Where a Participating Employee terminates employment with the Company and the following conditions are met:
i) the Participating Employee reached XXXXXXXXXX years of age before the termination of employment;
ii) shares of the Company have been held by the Participating Employee or Affiliated Shareholders throughout the XXXXXXXXXX year period preceding the termination of employment;
iii) immediately after the termination of employment, the Participating Employee does not carry on any business that is in competition with the Company and does not assist any other person in carrying on such a business, unless this condition is waived by the directors; and
iv) the Participating Employee's employment was not terminated for cause,
then the Participating Employee or an Affiliated Shareholder of the Participating Employee will be entitled to retain a proportion of the Class A shares held at that time. The Company's Board of Directors is entitled to waive the age and holding period conditions. The proportion of shares will be determined in accordance with subparagraph 7(d) below.
(c) If, at the time of death of a Participating Employee, the Participating Employee and any Affiliated Shareholders of the Participating Employee have held Class A or B shares of the Company throughout the XXXXXXXXXX year period preceding such death, and the Participating Employee is survived by a spouse, a proportion of the Class A shares held by the Participating Employee and his or her Affiliated Shareholders immediately before the death of the Participating Employee may continue to be held. The Company's Board of Directors is entitled to waive the holding period condition. The proportion will be determined in accordance with subparagraph 7(d) below.
(d) Where a Participating Employee meets the conditions described in subparagraph 7(b) above at the time his or her employment is terminated or where a Participating Employee meets the conditions described in subparagraph 7(c) above at the time of his or her death, the aggregate number of Class A shares of the Company that may be retained (as described in subparagraph 7(b) or (c)) is equal to the product of
i) XXXXXXXXXX% of the largest percentage interest in the Company's capital stock held by the Participating Employee and Affiliated Shareholders at any one time, to a maximum of XXXXXXXXXX%
and
ii) the total number of Class A and C shares outstanding at the time of the Participating Employee's termination of employment or death, and the number of Class A shares that have been purchased by the Company pursuant to the Shareholders' Agreement and not sold to another person.
The excess Class A shares held by the Participating Employee and his or her Affiliated Shareholders at the termination date or the date of death of the Participating Employee over the number of shares that may be retained (as computed herein) will have to be sold in accordance with the terms of the Shareholders' Agreement.
(e) On the death or termination of a Participating Employee, the Class A shares retained within the parameters described in subparagraph 7(d) above will be converted to Class C shares of the Company. If, as a result of the death of a Participating Employee, Class A shares of the Company become property of the deceased' s spouse or a trust of which the spouse is a beneficiary, the spouse or trust will be entitled, but not required, to convert such shares to Class C shares. The election to convert the shares will be permitted to be made by the spouse or trustee before the deceased's legal representative transfers the legal ownership of the Class A shares. Even though it is likely that the deceased's spouse or the trustee will elect to convert the shares, the spouse and the trustee will have the option of not electing thereby having to dispose of the Class A shares as described in subparagraph 8(d) below.
(f) A requirement will be added that if XXXXXXXXXX% or more of the Company' s shares are Class C shares, one of the directors of the Company must be a retired employee.
(g) The provisions giving a shareholder who has sold shares the right to require those shares if a takeover occurs will be eliminated, and all existing rights to reacquire shares will be cancelled.
(h) A person will be permitted to acquire Class A shares or convert Class A shares to Class C shares only if the person is a party to the Supplementary Shareholders' Agreement.
8. The Company's shareholders will enter into a new agreement (the “Supplementary Shareholders' Agreement") that contains the following provisions:
(a) The Company will pay a quarterly dividend on the Class C shares, at the same times as bonus payments are made to employees. The amount of each dividend will be determined so that the after-tax amount of the dividend per Class C share is equal to the after-tax amount of the corresponding bonus payments to Participating Employees divided by the number of outstanding Class A shares held by the Participating Employees and their Affiliated Shareholders. After-tax amounts will be computed on the assumption that recipients of payments are resident in XXXXXXXXXX and that dividends and bonuses are taxable at the highest marginal tax rate. If the Company increases base salaries beyond the level of salaries for employees performing similar functions for other employers, the excess salaries will be treated as bonuses for the purpose of determining the amount of dividends to be paid.
(b) A holder of Class C shares will be permitted to transfer the shares to anyone who has agreed to become a party to, and be bound by, the Supplementary Shareholders' Agreement. Holders of Class C shares will be required to sell all or a portion of their shares in the event of a takeover of the Company, and to convert their shares to Class A shares in the event the Class A shares become publicly traded.
(c) A holder of Class C shares of the Company will be required to convert the shares to Class A shares and sell the Class A shares to persons designated by the Company's Board of Directors after the shares have been outstanding for XXXXXXXXXX years (or, if earlier, on the XXXXXXXXXX anniversary of the death of an employee in the case of shares issued as a result of the death) or when any of the following events occurs:
i) both the former Participating Employee to whom (or in respect of whom) the shares were issued and the former Participating Employee's spouse (if any) have died;
ii) the holder fails to provide evidence at the directors' request that either the former Participating Employee or the spouse referred to in i) is alive; or
iii) the former Participating Employee referred to in i) carries on a business in competition with the Company or assists another person in carrying on such a business, unless the holders of Class A shares vote to waive the requirement to convert the shares.
(d) A person entitled to hold Class A shares after the death of a Participating Employee will be required to sell the shares as described in subparagraph 8(c) above on the occurrence of any of the relevant events referred to in that subparagraph (other than an event described in subparagraph 8(c)(ii) above).
(e) The sale price for Class A shares required to be sold as described in subparagraph 8(c) above will be determined in the same manner as specified in Schedule A of the Shareholders' Agreement.
(f) The Class C shareholders will have the right to elect a majority of the directors if the Company has not paid dividends as required by the Supplementary Shareholders' Agreement (as described in subparagraph 8(a) above).
Purpose of the Proposed Transactions
9. The purpose of the proposed transactions is to provide certain long-service employees or their beneficiaries, in the case of death, with an income stream for a fifteen year period thereby recognizing the long-service employee's contributions to the success of the Company. In addition, retirees will be motivated to act in the Company's best interest.
Additional Information
10. To the best of your knowledge and the knowledge of the Company, none of the issues involved in this ruling request is being considered by a tax services office or taxation centre in respect of a return already filed and none are under objection.
Ruling
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described herein, our ruling is as follows:
A. The requirement that a person has to become a party to the Supplementary Shareholders' Agreement before being able to hold Class A or Class C shares of the Company will not, in and of itself, result in the transfer of the Class A or Class C shares to the person failing to vest indefeasibly for the purposes of determining whether subsection 70(6) of the Act would apply to a transfer of the shares to the person.
The above ruling, which is based on the Act in its present form and does not take into account any proposed amendments thereto, is given subject to the general limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996, and is binding on Revenue Canada provided that the proposed transactions are completed by XXXXXXXXXX.
Comments
(i) This letter does not express or imply, and should not be construed as expressing or implying, that any ruling, opinion, confirmation or approval in respect of whether a transfer will meet the conditions of subsection 70(6) of the Act. This matter can only be determined after an examination of all of the relevant facts pertaining to the death of a Participating Employee or former Participating Employee.
(ii) Nothing in this letter should be construed as implying that Revenue Canada has agreed to or reviewed any of the tax consequences arising from any of the facts or proposed transactions described herein other than those specifically referred to in the ruling given above.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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