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: Where shares of a Targetco are exchanged for the shares of a Purchaseco ("shares exchange arrangement") in which a right to dissent is conferred on the shareholders of Targetco under the Canada Business Corporations Act ("CBCA"), whether the shares of Targetco held by the dissenting shareholders are not considered to be outstanding shares of Targetco for the purpose of the transactions constituting the shares exchange arrangement under paragraph 256(7)(e) of the Income Tax Act ("Act")?
Reasons: The dissenting shareholders of Targetco, when exercising the statutory right to dissent, cease to have any rights as a shareholder of Targetco under subsection 190(11) of the CBCA.
XXXXXXXXXX Daniel Wong
July 30, 2001
Re: Technical Interpretation Request: Paragraph 256(7)(e) of the Income Tax Act ("Act")
This is in reply to your letter of July 5, 2001 wherein you requested confirmation that the arrangement undertaken by Canco as described below will not be disqualified under paragraph 256(7)(e) of the Act.
Canco is a public corporation and a taxable Canadian corporation and is governed by the Canada Business Corporations Act ("CBCA"). Its share capital consists solely of one class of common shares which are listed for trading on a prescribed stock exchange in Canada. No person owns more than 10 % of the outstanding and issued Canco common shares. Canco is not controlled by any person or group of persons for purposes of the Act.
Holdco is a taxable Canadian corporation and is governed by the CBCA. Holdco has no assets or liabilities. Its authorized share capital consists of common shares.
Canco undertakes an arrangement ("Arrangement") pursuant to subsection 192(1) of the CBCA whereby all the Canco common shares (other than those shares held by the dissenting shareholders of Canco described below) are disposed of to Holdco for consideration that consists solely of the Holdco common shares. The Arrangement is subject to the approval by the special resolution of the shareholders of Canco and the Court.
Subsection 190(1) of the CBCA confers upon the shareholders of Canco a right to dissent with respect to the Arrangement. Further, under subsection 190(11) of the CBCA, a dissenting shareholder of Canco, when exercising the statutory right to dissent pursuant to subsection 190(7) of the CBCA, ceases to have any rights as a shareholder other than the right to be paid by Canco the fair value of his or her Canco common shares as determined in accordance with subsection 190(3) of the CBCA.
Immediately after all the Canco common shares (other than those shares held by the dissenting shareholders of Canco described above) are disposed of to Holdco, Holdco is not controlled by any person or group of persons and the fair market value of the Canco common shares is not less than 95 % of the fair market value of all the assets of Holdco.
In your letter, you outlined what appears to be an actual fact situation related to transactions and events which have taken place. The review of such situations is generally the responsibility of the local taxation services offices and, as outlined in paragraph 22 of Information Circular 70-6R4, it is not our practice to provide specific opinions on factual situations otherwise than in the context of an advance income tax ruling. In any event, a request cannot be considered for a ruling when the transactions are completed or where the issues involved are primarily questions of fact.
Nevertheless, we are prepared to provide the following comments which we hope will be of assistance to you.
Paragraph 256(7)(e) of the Act states that
"where at any time all the shares of the capital stock of a particular corporation are disposed of to another corporation (in this paragraph referred to as the "acquiring corporation") for consideration that consists solely of shares of the acquiring corporation's capital stock and, immediately after that time,
(i) the acquiring corporation is not controlled by any person or group of persons, and
(ii) the fair market value of the shares of the capital stock of the particular corporation is not less than 95% of the fair market value of all the assets of the acquiring corporation,
control of the particular corporation and of each corporation controlled by it immediately before that time is deemed not to have been acquired by the acquiring corporation solely because of the disposition."
In our view, where a shareholder of Canco exercises the statutory right to dissent with respect to the Arrangement under the CBCA, he or she ceases to be a shareholder of Canco and consequently, the Canco common shares held by the dissenting shareholder will no longer be considered to be outstanding shares of Canco for the purposes of the transactions constituting the Arrangement. As a result, the Arrangement described above will not necessarily be disqualified under paragraph 256(7)(e) of the Act by reason only that the dissenting shareholders dispose of their Canco common shares to Canco and receive consideration other than shares of Holdco, such as cash, by virtue of exercising the statutory right to dissent as provided for in section 190 of the CBCA.
The above comments represent our general views with respect to the subject matter of your letter and are provided in accordance with paragraph 22 of Information Circular 70-6R4.
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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