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: The application of paragraph 256(1.1)(a) to a particular situation.
Position: It should ordinarily apply.
Reasons: Meets the requirements of the law.
XXXXXXXXXX 2005-011497
Fiona Harrison
March 14, 2006
Dear XXXXXXXXXX:
This is in reply to your letter of January 31, 2005, wherein you requested a technical interpretation with respect to the application of paragraph 256(1.1)(a) of the Income Tax Act (the "Act").
Subsection 256(1.1) of the Act contains the definition of "specified class" for the purposes of the determination of "associated corporations" under subsection 256(1) and lists five conditions that must be met in order for a class of shares to be considered as a "specified class". Paragraph 256(1.1)(a) requires that, under the terms or conditions of the shares or any agreement in respect thereof, the shares must not be convertible or exchangeable.
In your particular situation, you ask us to assume that the Class A Preferred shares of a corporation meet all of the conditions contained in paragraphs 256(1.1)(b) through (e). While neither the terms and conditions of the Class A Preferred shares nor any agreement in respect thereof specifically provide for a share conversion or exchange, they do not specifically preclude such share conversion or exchange. Consequently, it is possible that a shareholder may, in the future, decide to sell, if the corporation agrees to purchase, some or all of his Class A Preferred shares to the corporation in exchange for another class of shares and utilize the rules under section 51, 85 or 86.
You enquire as to whether the condition in paragraph 256(1.1)(a) has been met in the above-described situation.
In our view, where the terms and conditions of the Class A Preferred shares and all agreements in respect thereof do not specifically provide for a share conversion or exchange, the condition in paragraph 256(1.1)(a) would ordinarily be satisfied.
The foregoing comments represent our general views with respect to the subject matter of your letter and, in accordance with Information Circular 70-6R5, are not binding on the Canada Revenue Agency.
Yours truly,
Mark Symes
Manager
Corporate Reorganizations Section I
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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