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.
Principal Issues: Are rights identical?
Position: In this fact situation - No.
Reasons: The law.
XXXXXXXXXX 2004-009373
Michael Cooke
December 1, 2004
Dear Sir/Madam:
Re: Paragraph 15(1)(c) - Meaning of Identical Right
This is in reply to your letter of September 3, 2004 wherein you requested our comments with respect to the above provision of the Income Tax Act (the "Act") as it applies to the fact situation described in your letter. All statutory references, unless otherwise indicated, are to the Act.
The facts in your letter are briefly restated as follows:
1. Aco has two classes of common shares, Class A and B.
2. Each Class A common share is entitled to one vote while each Class B common share is entitled to ten votes.
3. Class B shares are exchangeable at any time into Class A shares on a one-for-one basis.
4. There are no other differences between the terms and conditions of the two classes of common shares issued by Aco that could cause the fair market value of the Class A common shares to differ materially from the fair market value of the Class B common shares.
5. Aco conferred on all its common shareholders rights to acquire additional common shares of the corporation. Specifically, a right to acquire one additional Class A common share was issued for every five Class A common shares so owned ("Series A Right") and a right to acquire one additional Class B common share was issued for every five Class B common shares so owned ("Series B Right"). Each right was issued by Aco for no consideration and any fractional rights were rounded up to the nearest whole number.
6. Each Series A Right is immediately exercisable for the purchase price of $25.00.
7. Each Series B Right is immediately exercisable for the purchase price of $27.00.
8. At the time the Series A Rights and Series B Rights were conferred, the fair market value of a Class A common share was $32.00 and the fair market value of a Class B common share was $39.00. Accordingly, the fair market value of a Series A Right was $7.00 and the fair market value of a Series B Right was $12.00 at that time.
In your letter you note that for the purposes of subsection 15(1), subparagraph 15(1)(c)(i) deems two classes of common shares with different voting rights to be identical shares if there are no other differences in the terms and conditions of the two classes of shares that could cause the fair market value to differ materially. As such, it is your view that the Class A common shares and Class B common shares of Aco would be deemed to be identical shares for the purposes of subsection 15(1).
You also note in your letter that subparagraph 15(1)(c)(ii) provides that rights (to acquire shares) are not considered to be identical where the cost of acquiring such rights differs between shareholders. Since both the Series A Rights and Series B Rights were issued for no consideration, it is your view that subparagraph 15(1)(c)(ii) would not apply to deem the Series A Rights and Series B Rights not to be identical rights.
However, notwithstanding the above, because the FMV of a Series A Right is $7, which represents 22% of the FMV of a Class A common share, and the FMV of a Series B Right is $12, which represents 31% of the FMV of a Class B common share, at the time such rights were issued it is your view that such rights may not be identical. Accordingly, you have asked for our views on this matter.
Your request appears to relate to a completed transaction involving a specific taxpayer. Confirmation of the income tax consequences of such transactions must be made to the taxpayer's local Tax Services Office. We can, however, provide the following comments.
The Canada Revenue Agency's ("CRA") views on the meaning of identical rights for the purposes of paragraph 15(1)(c) are available in the following interpretation bulletins; IT-116R3, IT-432R2 and IT-96R6. Generally, the income tax consequences of a corporation issuing such rights can only be determined once all the relevant facts are known, which as you know, can only be done on a case by case basis. Notwithstanding the above, it is our view that in the above situation the Series A Rights and the Series B Rights are not identical rights for the purpose of paragraph 15(1)(c).
We trust that our comments will be of assistance to you. However, as stated in paragraph 22 of Information Circular 70-6R5, the opinion expressed in this letter is not a ruling and consequently is not binding on the CRA.
Yours truly,
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Planning Branch
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