24 February 2003 External T.I. 2002-0149955 - Section 116 & Share Consolidation116

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:

1. Where, in a share consolidation of a public corporation ("Pubco1"), the shareholders of Pubco1 receive cash (not exceeding $200) in lieu of their post-consolidation fractional Pubco1 shares, whether such cash receipt by the shareholders would cause the share consolidation to fall outside the circumstances described in IT-65?

2. Whether we would extend our administrative practice in IT-474, where we administratively waive the requirement to obtain a section 116 clearance certificate for the non-resident shareholders of a corporation on an amalgamation to which subsection 87(4) would apply, to a wind-up of a public corporation ("Pubco2") to which subsection 88(2) would apply?

Position:

1. No.

2. No.

Reasons:

1. As long as the share consolidation complies with the circumstances described in IT-65, the dispositions, by the shareholders of Pubco1, of their post-consolidation fractional Pubco1 shares, will not, in and by themselves, cause the share consolidation to fall outside the circumstances described in IT-65.

2. There is no basis for extending our administrative practice in IT-474 to the wind-up of Pubco2 situation.

2002-014995
XXXXXXXXXX Daniel Wong
(613) 954-4949
February 24, 2003

Dear XXXXXXXXXX:

Re: Technical Interpretation Request: Taxable Canadian Property

This is in reply to your letter of June 27, 2002 wherein you requested our opinion as to whether

(a) the shareholders of a public corporation, Pubco1, would, in the share consolidation described in scenario A below,

(i) be considered to have disposed of their pre-consolidation Pubco1 shares; and,

(ii) where Pubco1 pays each of them cash not exceeding $200 in lieu of a post-consolidation fractional Pubco1 share, be allowed to treat the cash amount as a gain or loss from the disposition of such fractional share, or reduce, by the cash amount received, the adjusted cost base ("ACB") of their post-consolidation Pubco1 shares; and

(b) we would waive the requirement to obtain a section 116 clearance certificate for the non-resident shareholders of a public corporation, Pubco2, where the non-resident shareholders dispose of their Pubco2 shares on the wind-up of Pubco2, and where, prior to the wind-up of Pubco2, Pubco2 shares are delisted from a prescribed stock exchange as described in scenario B below.

Scenario A

Pubco1 is a taxable Canadian corporation and public corporation. Pubco1 will carry out a share consolidation such that all of the shares of a class of its capital will be replaced by a lesser number of shares of the same class of its capital in the same proportion for all of its shareholders (for example, every 100 pre-consolidation Pubco1 shares will be replaced by 1 post-consolidation Pubco1 share). In the event that the share consolidation results in a shareholder owning a fraction of a post-consolidation Pubco1 share (for example, assume 1050 pre-consolidation Pubco1 shares will be replaced by 10.5 post-consolidation Pubco1 shares), Pubco1 will pay the shareholder an amount not exceeding $200 as consideration for the shareholder's fractional (0.5) Pubco1 share.

You indicated that under the applicable corporate legislation, the Pubco1 share consolidation would not result in any cancellation, by Pubco1, of its pre-consolidation shares or issuance, by Pubco1, of its post-consolidation shares to its shareholders. Pubco1 would simply redefine its issued and outstanding shares under the share consolidation.

Scenario B

Pubco2 is a taxable Canadian corporation and public corporation, whose shares are listed on a prescribed stock exchange (as described in section 3200 of the Income Tax Regulations ("Regulations")).

Immediately prior to a wind-up of Pubco2 to which subsection 88(2) would apply, and a distribution by Pubco2 of its assets to its shareholders, the Pubco2 shares are delisted from the prescribed stock exchange. Consequently, the Pubco2 shares are taxable Canadian property of the shareholders of Pubco2, by virtue of paragraph (d) of the definition of "taxable Canadian property" in subsection 248(1) of the Income Tax Act ("Act"). However, they are not excluded property (as defined in subsection 116(6) of the Act) during the course of the winding-up of Pubco2.

As part of the wind-up of Pubco2, the shareholders of Pubco2 would dispose of their Pubco2 shares, which disposition would make the non-resident shareholders of Pubco2 subject to a section 116 clearance certificate requirement.

You indicated that the section 116 clearance certificate requirement in this case would impose a practical burden on numerous Pubco2 non-resident shareholders. Further, you noted that some of the Pubco2 non-resident shareholders might very well be resident in a country with which Canada has a tax treaty and be exempt from Canadian capital gains tax.

Our Comments

In your letter, you have 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 70-6R5, 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 that we hope will be of assistance to you.

We have stated in Interpretation Bulletin IT-65 that where all the shares of a class of stock of a corporation are replaced by a greater or lesser number of shares of the same class of stock of the same corporation in the same proportion for all shareholders, in circumstances where there is no change in the total capital represented by the issue, there is no change in the interest, rights or privileges of the shareholders and there are no concurrent changes in the capital structure of the corporation or the rights and privileges of other shareholders, no disposition or acquisition is considered to have occurred.

In our view, the dispositions, by the shareholders of Pubco1, of their post-consolidation fractional Pubco1 shares, will not, in and by themselves, cause the share consolidation described in scenario A above to fall outside the circumstances described in Interpretation Bulletin IT-65. However, the shareholders of Pubco1 should report any gain or loss, realized or incurred by them from the disposition of their fractional shares.

Further, there is no basis for extending our administrative practice involving fractional interest in shares, as discussed in the current version of Interpretation Bulletin IT-115 (Fractional Interest in Shares), IT-450 (Share for Share Exchange) and IT-474 (Amalgamations of Canadian Corporations), where we administratively allow a taxpayer to ignore the calculation of gain or loss and instead reduce, by the amount received, the ACB of the shares received by the taxpayer, to the situation described in scenario A above.

Lastly, we agree with you that, under the circumstances described in scenario B above, section 116 of the Act is applicable to the non-resident shareholders of Pubco2. However, there is no basis for extending our administrative practice in IT-474, where we administratively allow a taxpayer not to comply with the procedures set out in section 116 in respect of the deemed disposition of its old shares of a corporation on an amalgamation to which subsection 87(4) is applicable, to the situation described in scenario B above. Since you believe that the 116 clearance certificate requirement would impose a practical burden on Pubco2 non-resident shareholders, we will forward a copy of this letter to the Department of Finance for their consideration.

These comments are provided in accordance with paragraph 22 of Information Circular 70-6R5.

Yours truly,

for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch