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: Does the proposed removal of paragraph 13 from IT-419R mean that the CCRA has changed its position regarding the treatment of rights of first refusal and "shotgun" provisions in shareholder agreements for the purposes of subsection 251(5)(b)? If so, will Mr. B be considered to control Corporation A in the circumstances described above?
Position: CCRA has not changed its administrative position regarding rights of first refusal and "shotgun" arrangements in shareholder agreements for purposes of subsection 251(5)(b). Therefore, Mr. B will not be considered to control Corporation A in the circumstances described.
Reasons: There has been no change in CCRA's administrative position.
CALU - Conference for Advanced Life Underwriting (2003)
Meaning of Control
Mr. A owns 80% of the shares of Corporation A. Mr. B owns all of the shares of Corporation B and 20% of the shares of Corporation A. Mr. A and Mr. B enter into an agreement that provides that, if either party wishes to sell his shares in either Corporation A or Corporation B, the other party is granted a right of first refusal to buy such shares.
We understand from a technical interpretation letter (Document No. 2002-0145225, dated August 20, 2002) that the CCRA proposes to remove paragraph 13 from a forthcoming revision to IT-419R
Based on paragraph 13 of IT-419R as it currently reads, the presence of a right of first refusal and/or "shotgun" provision in the shareholders' agreement would not be sufficient, in and of itself, for Mr. B to be deemed to control Corporation A as a result of the application of subparagraph 251(5)(b)(i).
Does the proposed removal of paragraph 13 from IT-419R mean that the CCRA has changed its position regarding the treatment of rights of first refusal and 'shotgun' provisions in shareholders' agreements for the purposes of subsection 251(5)? If so, will Mr. B be considered to control Corporation A in the circumstances described above?
The CCRA has not changed its administrative position. The CCRA is planning only to amend paragraph 13 of IT-419R, not to delete it. It is expected that the amended paragraph 13 will read substantially as follows:
Although the wording in paragraph 251(5)(b) may be broad enough to include almost any buy-sell agreement, this paragraph will not normally be applied solely because of a "right of first refusal" or a "shotgun arrangement" (i.e., an arrangement under which a shareholder offers to purchase the shares of another shareholder and the other shareholder must either accept the offer or purchase the shares owned by the offering party) contained in a shareholder agreement.
In light of the above, Mr. B's right of first refusal, in itself, would not ordinarily result in paragraph 251(5)(b) deeming Mr. B to control Corporation A in the circumstances described.
We note, however, that the administrative position set out in paragraph 13 of IT-419R is confined to rights contained in shareholder agreements, i.e., agreements between the shareholders of the corporation in question. As Mr. A is not a shareholder of Corporation B, the administrative position would not apply to the right of first refusal that he has with respect to Mr. B's shares of Corporation B.
April 29, 2003
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