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: Estate Freeze Valuation of Shares. Question previously addressed in BCTC 2009.
Position: See below.
Reasons: See below.
2010 CTF Conference November 28, 2010
Value of Vote-Only Shares Question 17
At the 2009 British Columbia Tax Conference the CRA stated that in the context of an estate freeze of a Canadian-controlled private corporation, where the freezor, as part of the estate freeze, keeps controlling non-participating preference shares in order to protect his economic interest in the corporation, the CRA generally accepts not to take into account any premium that could be attributable to such shares for the purposes of subsection 70(5).
Can you confirm that this position also applies for the purposes of paragraph 104(4)(a) and in particular with respect to the deemed disposition arising on the death of:
1. the spouse or common-law partner who is the beneficiary of a spousal trust or common-law partner trust;
2. the settlor of an alter ego trust; and
3. the surviving spouse or common-law partner who was a beneficiary of a joint spousal or common-law partner trust?
The 2007 CRA Round Table questions included:
Question - What is the CRA's position on the value of a private company that is attributable to voting non-participating shares?
Response The CRA does not have an established position on valuing different types of property. Information Circular 89-3, outlines the valuation principles and policies that CRA generally considers and follows in the valuation of securities and intangible property of closely held corporations for income tax purposes. IC 89-3 discusses, in general terms, the approaches applicable to closely held or private corporations, recognizing that the facts and circumstances of each case will be determinative of fair market value. The valuator must use reasonable judgment and objectivity in the selection and analysis of the relevant facts of each case.
For the above-noted reasons, it is not the intention of the CRA to write a policy or state a formal position regarding this issue.
When we value different classes of shares in a company, we generally determine the "en bloc" fair market value and then allocate the value to each class in isolation. The fair market value of each class of shares must be determined on its own merits according to the individual rights and restrictions of each class. In other words, we consider what a hypothetical arm's length purchaser would be willing to pay for a particular class of shares based on the rights, restrictions and conditions, which ultimately affect the economic benefits to be derived from ownership. Given the above, there may be many factors which might influence the value of voting control.
We are not aware of any case law that deals specifically with the allocation of value among various classes of shares where voting rights were separated from participation.
It is the opinion of the CRA that a hypothetical purchaser would be willing to pay some amount for the voting control of a company. It is difficult to ascertain what a pure voting right would be worth. However, the answer to this question will depend upon the facts and circumstances of each case.
At the British Columbia Tax Conference in October 2009, the CRA further clarified its position regarding the control premium on freeze shares and stated the following:
"The CRA's position is that non-participating controlling shares have some value and may therefore bear a premium. However, in the context of an estate freeze of a Canadian-controlled private corporation, where the freezor, as part of the estate freeze, keeps controlling non-participating preference shares in order to protect his economic interest in the corporation, the CRA generally accepts not to take into account any premium that could be attributable to such shares for the purposes of subsection 70(5) of the Income Tax Act at the freezor's death."
As was noted in our response to Question 1 during the 2009 British Columbia Tax Conference, CRA does not have an established position on valuing different types of property, including shares, as the valuation is dependent on the facts and circumstances of each situation. However, as was noted, CRA generally will ignore any premium that could be attributed to controlling non-participating preference shares, for purposes of subsection 70(5) of the Income Tax Act (the "Act"), where the shares were held to protect the deceased's economic interest in the corporation.
We are not aware of the issue of the valuation of such shares having arisen in any CRA compliance audits involving paragraph 104(4)(a) of the Act. Accordingly, we have not had the opportunity to give full consideration to whether the above position should apply for purposes of that provision. However, if you have actual fact situations in which you believe an attributed premium could arise, the CRA would be pleased to consider this issue further.
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