26 February 1990 Internal T.I. 59387 F - Reorganization of Capital of Corporation - Exchange of Shares

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.

February 26, 1990

Dear Sirs:

Re:  Paragraph 85(1)(e.2) or subsection 86(2) of the Income Tax Act (the "Act")

This is in response to your letter of January 5, 1990 in which you requested our opinion with respect to the application of the above referenced provisions of the Act to the following hypothetical situation.

Specifically, you described preferred shares issued pursuant to an estate freeze that were restricted with respect to retractability - that is, only 10% of the shares could be redeemed each year.  Your concern is whether such a feature would result in the application of paragraph 85(1)(e.2) where such shares are issued pursuant to a transaction that is subject to subsection 85(1) of the Act, or, the application of subsection 86(2) of the Act where such shares are issued pursuant to subsection 86(1) of the Act.

As stated in question #13 of the 1980 Revenue Canada Round Table, the Department's concern is with the value of the shares received as consideration, either for shares transferred to the corporation, pursuant to subsection 85(1), or for the shares disposed of as part of a reorganization pursuant to subsection 86(1) of the Act.  In our view such a feature as described above, which affects the retractability of the shares, would affect the value of the shares and either paragraph 85(1)(e.2) or subsection 86(2) could apply, as the case may be.  However, this may not be the result if other terms of the shares maintained the appropriate fair market value.  Such might be the case if the preferred shares carried a cumulative dividend entitlement at an appropriate rate.

The comments contained herein are expressions of opinion given in accordance with paragraph 24 of Information Circular 70-6R and do not constitute an advance income tax ruling.

Yours truly,

for DirectorReorganization and Non-Resident DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch