25 September 1990 Ruling 902191 F - Associated Corporations - Rights to Acquire 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.

September 25, 1990

Dear Sirs:

Re: Subsection 256(1.4) of the Income Tax Act (the "Act")

We are writing in response to your letter of August 16, 1990 wherein you requested our opinion on the application of subsection 256(1.4) of the Act in the following hypothetical situation.

     "The shareholder's agreement for Company A provides that a shareholder wishing to dispose of his shares must give notice to the company of his intention.  After notice is received, the corporation may elect to acquire the shares held by the shareholder wishing to dispose of his shares.  If the corporation does not elect to acquire the shares, the remaining shareholders must purchase these shares on a pro-rata basis based on the number of shares owned by the continuing shareholders".

Your concern is that subsection 256(1.4) of the Act would be applicable to the above situation and as such it could be argued that each shareholder could be considered to have a right to acquire the shares of the other shareholders and therefore, Company A would be associated with any corporation controlled by another shareholder.

It is our opinion that the wording of subsection 256(1.4) may be broad enough to include any shareholder agreement.  However, it is generally the Department's practice not to apply this paragraph unless all shareholders clearly have either a right or an obligation to buy or sell, as the case may be.

In the situation described it would appear that no shareholder of Company A has a right or obligation to purchase the shares of another shareholder until such time as that other shareholder gives notice of his intention to sell his shareholdings, and then only subject to the right of first refusal by Company A. As stated in Interpretation Bulletin IT-64R2 "shareholder agreements commonly referred to as "the right of first refusal" are considered not to confer a right to acquire a share but rather an option to acquire, in certain future circumstances, a right to acquire a share".

We therefore are of the opinion that subsection 256(1.4) would not be applied to the situation as described.  However, an examination of all relevant facts and documents may result in a different conclusion.

As explained in paragraph 24 of Information Circular 70-6R any written or verbal opinions are not rulings and are not binding upon Revenue Canada in respect of any taxpayer.

Yours truly,

for DirectorReorganizations and Non-Resident DivisionLegislative and Intergovernmental Affairs Branch