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.
1992 Corporate Management Tax Conference
RIGHT OF FIRST REFUSAL/SHOTGUN ARRANGEMENT
Question 8
Interpretation Bulletin IT-64R2 was recently replaced by IT-64R3 applicable to 1990 and subsequent taxation years. In paragraph 31 of IT-64R2, the statement was made that paragraph 251(5)(b) will not be considered to apply to a right of first refusal or a "shotgun arrangement". In paragraph 37 of IT-64R3, the same statement is made about subsection 256(1.4) but no mention is made of paragraph 251(5)(b). In IT-419, the Department states that paragraph 251(5)(b) will not be considered to apply to a right of first refusal. No mention is made of a "shotgun arrangement".
Questions
- (1) Do the comments in paragraph 37 of IT-64R3 apply to paragraph 251(5)(b) for taxation years after 1989?
- (2) If not, what is the Department's current position regarding the application of paragraph 251(5)(b) to a right of first refusal or a shotgun arrangement?
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- (3) Will the Department consider extending this apparent administrative concession to cover rights to acquire shares in certain events of default which are commonly found in shareholders' agreements, for example, in the case of the bankruptcy of a corporate shareholder?
Department's Position
Questions (1) and (2)
In answer to questions 1 and 2, the last paragraph in paragraph 3 in the Special Release to IT-419, dated August 12, 1991, reiterates the Department's position that paragraph 251(5)(b) does not apply in the case of a "right of first refusal" and normally does not apply to a "shotgun arrangement".
Question (3)
The Department will not extend this position to rights arising in other circumstances that are not expressly excepted by paragraph 251(5)(b).
Prepared by: J. Teixeira
June 11, 1992
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