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. Whether instalment receipts are shares eligible for the investment allowance.
2. Whether splitshares are shares eligible for the investment allowance.
Position:
Factual determination. Provided general comments.
Reasons:
1. Where outstanding shares have been sold on an instalment basis, if the purchaser of the instalment receipts has all the incidents of ownership of the shares, including dividend rights and voting rights, it would be reasonable to consider the acquisition of the instalment receipts as resulting in the ownership of the shares. If it can be established that the holder of the instalment receipt is in fact the owner of the shares, the holder would be entitled to claim an investment allowance for the shares to the extent permitted by paragraph 181.2(4)(a).
2. A splitshare is described as a common share split into a dividend part and a strictly capital appreciating part. While we not have previously considered the characterization of the dividend part and the capital appreciating part for Part I.3 purposes, we would look to the legal nature of the two parts to determine their treatment for Part I.3 purposes.
XXXXXXXXXX 2001-007667
April 19, 2001
Dear XXXXXXXXXX:
Re: Instalment Receipts and Splitshares
This is in response to your facsimile dated March 14, 2001 which was forwarded to us for reply by the Toronto Centre Tax Services Office. You have requested our views as to whether instalment receipts and splitshares are “shares” within the meaning of paragraph 181.2(4)(a) of the Income Tax Act (the “Act”).
Whether a particular instrument would constitute a share eligible for the investment allowance under paragraph 181.2(4)(a) of the Act depends on the legal nature of the instrument. Such a determination can only be made after a review of all of the relevant facts and documentation, including the prospectus for the particular instrument. Since your request relates to a completed transaction involving a specific taxpayer, you should submit the specific details, including the prospectus, to the appropriate tax services office for their consideration. However, we can offer the following general comments which may or may not be relevant to your particular situation.
Instalment receipts
It is our understanding that, in connection with an arrangement to sell shares to the secondary market on an instalment basis, the shares are sold at a predetermined price with a portion of the sale price payable at the time of the sale and the balance to be paid at some future date in one or more instalments. The purchase and beneficial ownership of the shares are evidenced by the issue, at the time of the initial payment, of an “instalment receipt” to the purchaser which receipt is listed on a stock exchange and may be traded. The share certificates are retained by and registered in the name of a custodian to secure the obligation of the purchaser to pay the final instalment or instalments. Upon the payment of the final instalment, the holder of the instalment receipt will become the registered holder of the shares. Under this arrangement, the shares remain as security for the unpaid purchase price but may effectively be traded on a stock exchange through the “instalment receipts”.
Where, under an instalment receipt arrangement, all of the incidents of ownership of the shares pass to the purchaser at the time of sale including the right to receive dividends and the right to vote, generally we have taken the view that the acquisition of the instalment receipt would result in ownership of the shares. Consistent with this position, if it can be established that the holder of an instalment receipt is in fact the owner of the shares, the holder would be entitled to claim an investment allowance in respect of the shares to the extent permitted by paragraph 181.2(4)(a) of the Act.
Splitshares
The information provided describes how a splitshare arrangement is structured. Essentially, Canadian Splitshare Corporation (“CSC”) makes an offer to investors of certain blue chip companies to exchange each of their common shares for two parts: a dividend part and a strictly capital appreciating part. These parts trade separately on a stock exchange and are secured by the underlying common share held by a trust company pursuant to a custodial agreement. A dividend part represents to the holder rights equal to the dividend rights and voting rights attached to the underlying common share whereas a holder of the capital appreciating part is entitled to the potential price appreciation above the exercise price. Both the dividend part and the capital appreciating part mature in five years from the date of issuance. Prior to maturity, an investor can surrender both parts in exchange for the underlying common share.
As noted above, if an investor is to claim an investment allowance in respect of the dividend part or the capital appreciating part under paragraph 181.2(4)(a) of the Act, the investor must establish that it is a share at law. We have not previously considered the legal nature of the component parts of a splitshare arrangement and without knowing the full particulars of the splitshares held by your client, we are not in a position to comment on the specific Part I.3 tax implications to your client. However, we can say that in making such a determination, we would consider whether or not there has been a disposition of the common share on the exchange of the common share for the two parts. Further, in determining the characterization of the two parts, we would look to the rights attached to each part and whether there is a legal basis to conclude that either part represents a share of the issuing company.
While we hope that our comments will be of assistance to you, they are given in accordance with the practice referred to in paragraph 22 of IC 70-6R4 and are not binding on the Agency in respect of any particular situation.
Yours truly,
Manager
Financial Institutions Team
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
cc: Patricia Caron
Toronto Centre Tax Services Office
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