17 May 1982 Income Tax Severed Letter 5-3986 - [Reorganization of Capital Section 86 of the Income Tax Act ("Act")]

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.

XXXX

D.H. Tingley (613) 995-1173

May 17, 1982

Dear XXXX

Re: Reorganization of Capital Section 86 of the Income Tax Act ("Act")

This is in reply to your letter of April 7, 1982 requesting our opinion as regards the application of section 86 of the Act to the following hypothetical situation:

1. The issued and outstanding common shares of Company A, a Canadian-controlled private corporation as defined in paragraph 125(6)(a) of the Act, are held as follows:

Mr. A 53 shares   @ $1.    $53.00
Mrs. A 50 shares @ $1.      50.00 
                                           _____
                                          $103.00

2. Company A obtains Articles of Amendment from the Ministry of Consumer and Commercial Relations, Ontario, (a) creating 1,000,000 Class "A" special shares, non-cumulative, voting, redeemable, retractable at the option of the holder (redeemable and retractable at $10. per share) and having a par value of $.01 per share and (b) entitling it to purchase any of its common shares subject to the provisions of the Business Corporations Act, Ontario.

3. Following receipt of the Articles of Amendment, Company A purchases the common shares of Mr. and Mrs. A for cancellation. As consideration for such purchase, Company A issues Class A special shares. The redemption price of $10. per share is equal to the fair market value of the common shares immediately before their purchase for cancellation.

4. Company A will then issue additional common shares from the remaining unissued common stock equally to Mr. A, Mrs. A and their two children, both of major age.

In such circumstances, subsection 86(1) of the Act could apply to the exchange of the common shares of Company A held by Mr. and Mrs. A for Class A special shares of Company A, provided that neither section 51 nor subsection 85(1) of the Act is applicable.

Section 51 would only be applicable in this situation if the terms of the common shares of Company A conferred upon the holders the right to exchange such shares for a convertible property of Company A. Subsection 85(1) of the Act would only apply if appropriate joint elections were made by Mr. and Mrs. A and Company A pursuant to subsections 85(1) and 85(6) of the Act.

You have also asked us what time limit the Department considers is reasonable to effect the purchase of the common shares and the issue therefor of the Class A special shares once the Articles of Amendment have been received.

In your hypothetical situation, from a practical standpoint, the Class A special shares should be issued by Company A in exchange for the common shares before the fair market value of the common shares changes since the redemption price of the Class A special shares is fixed at $10. per share. Generally, the reasonableness of any delay in effecting or completing a reorganization of capital will depend upon the special circumstances of each such reorganization.

Yours truly,

for Director Specialty Corporations Rulings Division Corporate Rulings Directorate Legislation Branch