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: 1. Application of section 51. 2. Amount paid on the redemption.
Position: 1. Yes. 2. No amount paid where 51(1) applies.
Reasons: 1. Wording of provision. 2. Amount paid on redemption where shares are issued is generally equal to the paid-up capital of those shares. Previous position is that an open-end mutual fund corporation does not have paid-up capital. Thus, no amount paid.
XXXXXXXXXX 2000-005026
D. Yuen
March 29, 2001
Dear XXXXXXXXXX:
Re: Mutual Fund Corporation - Treatment of Share
Conversions for Capital Gains Refund Mechanism Purposes
We are writing in response to your letter dated September 27, 2000 wherein you requested a technical interpretation in respect of the situation described below. Unless otherwise stated, all references to a statute herein are to the Income Tax Act (Canada), R.S.C. 1985 (5th supp.) c. 1, as amended (the "Act").
Situation
"Where a shareholder of a mutual fund corporation who holds his shares as capital property redeems those shares in accordance with the terms and conditions attaching to those shares in the Articles of Incorporation for the corporation in exchange for shares of another class of the same corporation, would the Canada Customs and Revenue Agency (the "CCRA") consider:
1. that the provisions in subsection 51(1) would apply to deem the convertible shares not to be disposed of; and
2. that the fair market value of the shares issued by the corporation in exchange for the convertible shares would be an amount paid by the corporation on the redemption of shares of its capital stock, for the purposes of factor A in the definition of 'capital gains redemptions' in subsection 131(6) of the Act."
You have asked us to assume that the terms and conditions attaching to all classes of shares of the corporation will provide that the shareholders have the right to redeem their shares in exchange for shares of another class, based on fair market value.
1. It is our view that, subject to the application of subsections 51(4) and 245(2), subsection 51(1) would apply to deem the exchange not to be a disposition of the convertible shares.
2. Where subsection 51(1) applied to the exchange, it is our view that there would not be an "amount paid by the corporation in the year on the redemption of shares of its capital stock" for the purposes of factor A in the definition "capital gains redemptions" in subsection 131(6).
These comments are provided in accordance with the guidelines set out in paragraph 22 of Information Circular IC 70-6R4 dated January 29, 2001 issued by the CCRA and are not considered binding on the CCRA.
Yours truly,
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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