25 October 1988 Income Tax Severed Letter 5-6600 - []

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.

Attention: XXXX B. Dwyer (613)957-2744

October 25, 1988

Dear Sirs:

Re: Term Preferred Shares

This is in reply to your letter dated September 14, 1988, in which you request confirmation of our assessing policy concerning certain aspects of subsections 112(2.1) and 191(4) of the Income Tax Act (Canada) (the "Act").

Subsection 112(2.1)

In the "Revenue Canada Round Table", Report of Proceedings of the Thirty- eighth Tax Conference, November 24-26, 1986 (Toronto: Canadian Tax Foundation, 1987), 51:1 - 51:43 (the "1986 Round Table") at 51:9, the Department stated the following concerning subsection 112(2.1):

It is a question of fact whether or not a term preferred share has been acquired by a specified financial institution in the ordinary course of its business. Generally, where the shares are acquired from a related corporation in the course of its reorganization and are quickly redeemed, they will not be considered to have been acquired in the ordinary course of its business.

You have requested confirmation that our assessing policy is still in accord with the above statement from the 1986 Round Table.

We have formulated no specific guidelines for determining whether shares acquired by a specified financial institution (an "SFI") have been acquired in the ordinary course of the SFI's business. As noted in the above statement, the determination of this issue will be a question of fact. Subject to these caveats, however, our assessing policy continues to be in accord with the above extract from the 1986 Round Table.

You have also requested confirmation that we would not regard share acquisitions consequent on internal reorganizations to occur "in the ordinary course of business" solely because a large, corporate group undertakes several rollover transactions. As an example, you refer to acquisitions followed by mergers of certain corporations and consolidation of businesses by asset transfers within the corporate group.

We confirm that shares acquired in the course of an internal reorganization will not be considered to be acquisitions effected in the ordinary course of business solely by reason of the large number of transfers involved in the reorganization. Nevertheless, we caution that this confirmation is based on the assumption that all acquisitions have to do with a reorganization effected for internal purposes rather than with the original takeover. As well, different considerations might apply if takeovers were a common occurence such that the parent corporation might be said to be in the business of acquiring corporations.

Subsection 191(4)

You have requested clarification of our general assessing position on subsection 191(4) in light of the following hypothetical situation:

A subsidiary acquires business assets from a sibling corporation and elects pursuant to section 85, issuing preferred shares to the sibling corporation. To raise funds for redeeming the preferred shares, the subsidiary issues common shares to its parent for cash. The end result in the subsidiary is a net increase in assets equal to the value of the business assets acquired from the sibling corporation. However, no increase in net assets has occurred if the corporate group is considered as a whole.

In this situation, we generally would not consider the redemption of the preferred shares to be "part of a series of transactions or events the purpose of which was to raise capital" for purposes of subsection 191(4).

General

The responses set out in this letter are purely of a general nature and do not take into account the numerous additional considerations that might arise in the context of specific factual situations. The opinions expressed in this letter do not constitute an advance income tax ruling and, in accordance with paragraph 24 of Information Circular IC 70-6R, are not binding on the Department.

Yours truly,

for Director Financial Industries Division Rulings Directorate