CRA finds that a debenture with a contingent conversion right and non-participating conversion ratio entailed loss of CCPC status

Opco is wholly-owned by a resident Canadian holding common shares with a current fair market value (FMV) of $2 million. However, a $5 million debenture held by a non-resident is convertible by the holder, in the event that Opco proceeds to a second round of financing, into that number of Opco common shares which, at that time, have an FMV of $5 million.

CRA appeared to find that Opco is not a Canadian-controlled private corporation, indicating that in computing the number of common shares into which the debenture was convertible at any particular time for purposes of s. 251(5)(b)(i), “the fair market value of the common shares of the capital stock of Opco then outstanding should be used.”

Neal Armstrong. Summary of 11 October 2019 APFF Roundtable, Q.11 under s. 251(5)(b)(i).