14 January 1993 Income Tax Severed Letter 9109895 - Reorganization

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

5-910989
XXXXXXXXXX D.A. Palamar
(613) 957-8953

Attention: XXXXXXXXXX
January 14, 1993

Dear Sirs:

Re: Request for Technical Interpretation

We are writing in response to your letter, dated April 2, 1991, in which you requested our interpretation of various provisions of the Income Tax Act (the "Act") (all statutory references in this letter are to the Act) with respect to a specific fact situation. We apologize for the delay in our response.

As was indicated in a telephone conversation, on April 18, 1991, between XXXXXXXXXX of your firm and Ms. McCarron-McGuire of this department, it is our view that your letter outlines actual proposed transactions rather than those of a hypothetical nature. Since this is the case, the proposed transactions noted in your letter should be the subject of an advance income tax ruling request. Information Circular 70-6R2, dated September 28, 1990, outlines the requirements for requesting an advance income tax ruling.

We are, however, providing you with the following comments of a general nature on three of the issues raised in your letter. A description of the situation in which these issues are relevant follows.

A corporation will reorganize its capital to create a separate new class of voting, participating, common shares and a separate new class of preference shares. The preference shares will be non-voting and carry a non-cumulative fixed dividend. Each preference share will give the holder of that share the right to use a particular property of the corporation, and will be redeemable and retractable for an amount equal to the fair market value of that particular property of the corporation at the time of redemption or retraction.

Issue 1

If the shareholders of the corporation exchange their common shares for a new common share and a new preference share, will subsection 86(1) apply to the exchange?

Issue 2 Will the use of a particular property of the corporation by a shareholder result in the application of subsection 15(1)?

Issue 3

Will the particular properties owned by the corporation be viewed as having been disposed of as a result of the reorganization of capital?

Our Position

We have not considered the issue whether, as a matter of corporate law, it would be possible to attach rights or attributes to a preference share that are different from those attached to another preference share of the same class. Our comments therefore assume that the preference shares described above are allowable under the applicable corporate law.

It is our view that, subject to subsection 86(2), subsection 86(1) will apply to the exchange of the common shares held by the shareholders for a new common share and a new preference share in the course of the reorganization of capital of the corporation.

It is also our view that the use, by a shareholder, of a particular property owned by a corporation, may result in the application of subsection 15(1) notwithstanding that the preference shares of the corporation held by such shareholder carry a right to use such property.

Depending on the circumstances, it may be possible to view the transactions as resulting in a distribution by the corporation of two distinct properties, one being shares and the other being the right to use a particular property. Accordingly, a disposition of property by the corporation may occur when the right to use property of the corporation is transferred to the shareholders.

The foregoing comments are given in accordance with the practice referred to in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990 and are not binding on Revenue Canada, Taxation. If you have any further questions please contact David Palamar at (613) 957-2094.

Yours truly,

for Director
Reorganizations and Foreign Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch