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: 1. Can a class of shares meet the definition of "tax deferred cooperative share" ("TDCS") in subsection 135.1(1) if some of the shares of that class meet the definition but others do not? 2. If the answer to question 1 is no, what happens if initially a class of shares meets the TDCS definition but, due to the issuance of a share to an ineligible member in a subsequent tax year, it now fails to meet the TDCS definition?
Position: 1. No. 2. The share issued to an ineligible member would not be a TDCS but the issuance of such share has no impact on shares of that class previously issued or those that may subsequently be issued.
Reasons: Legislation
XXXXXXXXXX 2006-021785
January 16, 2007
Dear XXXXXXXXXX:
Re: Agricultural Cooperatives - Tax Deferred Cooperative Shares
As requested, we are providing our comments with respect to your memorandum dated December 6, 2006 to XXXXXXXXXX concerning section 135.1 of the Income Tax Act (the "Act").
In your memorandum, you pose the following two questions for consideration:
1. Can a class of shares of an agricultural cooperative corporation meet the definition of "tax deferred cooperative share" ("TDCS") in subsection 135.1(1) of the Act (the TDCS definition) if some of the shares of that class meet the TDCS definition but other shares of that class do not?
2. If the answer to question #1 is no, then what happens if initially a class of shares meets the TDCS definition but, due to the issuance of a share to an ineligible member in a subsequent tax year, it now fails to meet the TDCS definition?
With respect to your first question, paragraph (d) of the TDCS definition provides that for a share to qualify as a TDCS it must be a share of a class
(i) the terms of which provide that the agricultural cooperative corporation shall not, otherwise than pursuant to an allowable disposition, redeem, acquire or cancel a share of the class before the day that is five years after the day on which the share was issued, and
(ii) that is identified by the agricultural cooperative corporation in prescribed form and manner as a class of TDCS.
Given that the above terms and conditions apply to a class of shares, it is not clear to us how the terms and conditions could apply to some shares of that class but not others. In any event, it is our view that in order for the conditions of paragraph (d) of the TDCS definition to be satisfied, all shares of a class must be subject to these terms and conditions. The Department of Finance has confirmed that this interpretation reflects the intent of the legislation.
Your second question deals with the situation wherein an agricultural cooperative corporation has created a class of shares that meets the requirements of paragraph (d) and has also complied with the requirements of paragraphs (a) to (c) of the TDCS definition but inadvertently issues a share of that class to a member who is not an "eligible member" as defined in subsection 135.1(1) of the Act.
In our opinion, such share will not be a TDCS on the basis that it fails to meet the requirement set forth in paragraph (a) of the TDCS definition. The issuance of the share in these circumstances would be governed by the provisions of section 135 of the Act. However, the issuance of this share has no impact or effect on shares of this class previously issued or those that may subsequently be issued. The issuance of such share would not alter the terms and conditions of the class of shares and therefore provided the requirements of paragraphs (a) to (c) of the TDCS definition have been satisfied with respect to shares of that class previously issued and are satisfied with respect to shares subsequently issued, such shares will qualify as TDCS.
We hope our comments are of assistance to you.
Yours truly,
F. Lee Workman
Manager
Charitable and Financial Institution Sectors
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
c.c.: Mr. Randy Schroeder
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