11 January 2002 External T.I. 2001-0104975 - WARRANT CONNECTED SHAREHOLDER

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues:

Will paragraph 4901(2.2) of the Regulations apply in a particular scenario to deem a person to be a connected shareholder of a corporation?

Position: Question of fact.

Reasons:

We would need to review the rights to determine the number of shares that the person has a right to acquire and any restrictions on acquisition that may exist.

XXXXXXXXXX 2001-010497
M. P. Sarazin, CA
January 11, 2002

Dear XXXXXXXXXX:

Re: Connected Shareholder and Application of Subsection 4901(2.2) of the Regulations

This is in reply to your letter of October 5, 2001, requesting our views as to whether paragraph 4901(2.2)(b) of the Income Tax Regulations (the "Regulations") would apply in determining whether or not a shareholder would be a connected shareholder for purposes of subsection 4900(12) of the Regulations where the shareholder's rights to acquire shares contain a restriction that will not allow for the exercise of the rights, in whole or in part, if the exercise will result in the shareholder owning, at that time, 10% or more of the issued and outstanding common shares of the corporation.

You are of the view that paragraph 4901(2.2)(b) of the Regulations should not apply to deem the shareholder that owns the rights to acquire shares to be a connected shareholder because of the restriction contained in the rights that will not permit any of the rights to be exercised if they will result in the shareholder owning 10% or more of the issued and outstanding common shares. In your view, a conclusion that paragraph 4901(2.2)(b) of the Regulations would not apply thereby resulting in the shareholder not being deemed to be a connected shareholder for purposes of subsection 4900(12) of the Regulations is consistent with the object and spirit of the particular provisions.

Comments

The determination of whether a right would result in a person being considered a connected shareholder under paragraph 4901(2.2)(b) of the Regulations is a question of fact. We would have to review the rights in order to make this determination. We note that, under subsection 4901(2.2) of the Regulations, a person is deemed to be a connected shareholder of a corporation at any time where the person would be a connected person if the person owned each share that the person had a right to acquire. In determining whether a person is a connected person under subsection 4901(2.2) of the Regulations, we would ensure that all of the shares that the person has the right to acquire are included in the determination. We would also consider any restrictions in respect of such rights in making this determination.

If you are contemplating specific proposed transactions then we would suggest that you consider requesting an advance income tax ruling in the manner described in Information Circular 70-6R4.

We trust these comments will be of assistance.

Yours truly,

Roberta Albert, CA
for Director
Financial Industries Division
Income Tax Rulings Directorate