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.
Query #23
A shareholder holds fixed redemption amount preference shares that are convertible into common shares. If, at the time of conversion, the common shares have a fair market value greater than the fixed redemption amount of the preference shares, will the excess be treated as a subsection 15(1) benefit to the shareholder at that time? It is assumed that there are no related parties involved in the transaction and that the conversion ratio was set such that, immediately after the issuance of the preference shares, any conversion would have been made solely for common shares of the same corporation having a fair market value equal to, or less than, the fair market value of the preference shares
Response
Based on the assumptions stated in the question, the subsequent conversion of the preference shares into common shares, at a time when the common shares had a fair market value greater than the fixed redemption amount of the preference shares, would not, in and of itself, ordinarily result in the excess being treated as a subsection 15(1) benefit to the shareholder at the time of conversion. We note that where certain conditions have been met, subsection 51(1) of the Act provides for a tax deferral of the gain realized on the exchange of convertible shares or debt into other shares of the same corporation
Prepared by Allan Nelson Leasing & Financing Section
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