15 May 1990 Income Tax Severed Letter 5-9342 - []

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 C. Robb (613)957-2744

Attention: XXXX

May 15, 1990

Dear Sirs:

Re: Subsection 191(4) of the Income Tax Act (Canada) (the "Act")

We are writing in response to your letter of December 27, 1989 in which you requested an elaboration of the response to question 20 given at the 1989 Revenue Canada Round Table concerning subsection 191(4) of the Act.

The first situation you have requested that we comment on involves a typical estate freeze arrangement. A parent transfers all the shares of an operating company ("Opco") to a newly-formed corporation ("Holdco") utilizing the provisions of subsection 85(1) of the Act to defer recognition of a capital gain on the transfer. The consideration received by the parent might include a preferred share retractable at the option of the parent for an amount equal to the fair market value ("FMV") of the Opco shares transferred. At the time the rights and restrictions attached to the preferred share are drafted, however, the FMV of the Opco shares would typically not have been determined. As a result, the rights and restrictions of the preferred share would stipulate that its redemption price would be an amount to be determined by a resolution of the directors, which would be passed at the time of the freeze or at a subsequent date.

In our view, the redemption amount of a preferred share, issued in the situation described may be considered to be a specified amount for the purposes of subsection 191(4) provided the directors set the redemption amount prior to the issuance of the share. If the redemption amount is set at a later date it would not be a specified amount referred to in subsection 191(4), since, for purposes of that subsection, the amount must be specified at the particular time referred in paragraph 191(4)(a), i.e., when the share is issued.

The second situation you described involves buy-sell provisions in a shareholders' agreement pursuant to which a corporation will repurchase shares at FMV based on some type of formula.

In our view, a formula results in the expression of an amount only when all the variables required for its operation are known. The time an agreement with respect to a share is changed or entered into is the particular time referred to in paragraph 191(4)(c). If, at that time, any of the variables for the operation of a formula are unknown, the formula would not specify an amount for the purposes of subsection 191(4).

In accordance with paragraph 24 of the Information Circular 70-6R, the opinions expressed herein do not constitute advance income tax rulings and consequently are not binding on Revenue Canada, Taxation.

Yours truly,

for Director Financial Industries Division Rulings Directorate