17 November 2000 External T.I. 2000-0029115 - Refreeze transactions

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.

Principal Issues:

i) whether a benefit is conferred on the common shareholders of Holdco in a refreeze transaction?

ii) whether a benefit is conferred on the common shareholders of Holdco in a refreeze transaction after the payment of a capital dividend?

iii) whether a benefit will be conferred on a trust which subscribes for common shares of Holdco after the payment of a capital dividend?

Position:

i) No

ii) & iii) We cannot provide an opinion as we are unable to determine all the relevant facts and circumstances of the particular situation.

Reasons:

i) Review committee recommended to accept "refreeze transactions" in 1997 and the 1997 APFF also indicated that the Agency will not normally consider that a benefit has been conferred upon common shareholders under this type of transaction where preferred shares were initially issued as part of an estate freeze, provided that the reduction in the fair market value of the preferred shares has not been caused by a stripping of the assets of the corporation and the fair market value of new preferred shares corresponds to the fair market value of the preferred shares that would be covered by the refreeze.

		2000-002911
XXXXXXXXXX 	Karen Power, C.A.
(613) 957-8953
Attention:  XXXXXXXXXX 

November 17, 2000

Dear Sirs:

Re: Refreeze Transaction

We are writing in response to your letter of May 30, 2000 wherein you requested our comments on the hypothetical situation described therein.

Our Comments

It appears that the opinion you seek relates to specific proposed transactions and, therefore, we bring to your attention Information Circular 70-6R3 issued on December 30, 1996. Confirmation of tax consequences with respect to proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. Consequently, we will only provide the following general comments.

It is the view of the Canada Customs and Revenue Agency that provided the decrease in value of the preferred shares in refreeze transactions is not the result of the stripping of corporate assets, we would not ordinarily consider a benefit to have been conferred on the common shareholders or the preferred shareholder on the exchange by the preferred shareholder of his or her original shares for new preferred shares having a fair market value equal to the present fair market value of the original preferred shares. However, in our view the payment of a dividend on another class of shares would be an example of a situation where the decrease in value is the result of the stripping of corporate assets.

We are unable to comment on the other issues raised in your letter without a thorough review of all the relevant facts and circumstances of the particular situation.

We trust our comments will be of assistance to you. These comments are provided in accordance with the guidelines set out in paragraph 22 of Information Circular 70-6R3 issued on December 30, 1996.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings Directorate
Policy and Legislation Branch
- 4 -