19 March 1992 External T.I. 9203965 F - Term Preferred Share

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.

            24(1)     5-920396

     G. Martineau

     (613) 957-8953

Attention:  19(1)

March 19, 1992

Dear Sir/Madam:

Re:  Subsection 112(2.1) of the Income Tax Act (the "Act")

This is in reply to your letter dated February 5, 1992, in which you requested our interpretation concerning the meaning of "acquired in the ordinary course of the business" in subsection 112(2.1) of the Act.

The situation outlined in your letter appears to involve actual proposed transactions with identifiable taxpayers. As indicated in Information Circular 70-6R2, we do not express opinions on specified proposed transactions other than as a reply to an advance income tax ruling. As a consequence, therefore, we may only offer the following general comments.

At page 51:9 of the "Revenue Canada Round Table", 1986 Conference Report, Canadian Tax Foundation, the Department stated the following concerning the meaning of "acquired in the ordinary course of business":

It is a question of fact whether or not a term preferred share has been acquired by a specified financial institution in the ordinary         course of its business ... Where a specified financial institution invests in term preferred shares of a related corporation, the shares will generally be considered to have been acquired in the ordinary course of business. Refer to question 62 in the 1984 Conference Report for the factors that have been considered in establishing whether shares were or not acquired in the ordinary course of business."

The Department had stated the following position at question 62:

"We understand that the major reason for the exclusion from the application of subsection 112(2.1) for shares "not acquired in the ordinary course of the business" of the holder was to minimize the possibility of dividends on "in-house" shares being denied a deduction under subsection 112(1) by virtue of subsection 112(2.1).

Factors that have been considered in establishing whether shares were or not acquired in the ordinary course of business are as  follows:

1. The nature of the holder's activities;                          

2. the number and frequency of such share acquisitions by the holder;  

3. whether the funds involved represent the initial capitalization      of a new subsidiary or the provision of additional operating capital to a subsidiary, both of which would normally indicate permanent capitalization;

4. the terms of the shares acquired and their status as "term preferred shares" otherwise than by virtue of control of the issuer by specified financial institutions; and

5. whether the shares were acquired as consideration on the sale of a business or part of a business where the holder's business has not previously included such transactions.

At page 609 of the "Revenue Canada Round Table", 1980 Conference Report, Canadian Tax Foundation, the Department stated the following:

     "...We are satisfied that shares issued on the incorporation of a

     wholly-owned subsidiary would not as a rule be "in the ordinary course of the business".

As stated earlier, the question of whether a share is or not acquired in the ordinary course of its business is always a question of fact.

Considering the above factors however, it is our view that where a corporation acquires shares of a wholly-owned subsidiary and the proceeds from the issue constitute permanent capital of the subsidiary such shares would not generally be considered to have been acquired in the ordinary course of the parent corporation's business. Therefore, shares acquired on the sale of a business or part of a business in the course of an internal reorganization within a corporate group would not occur in the ordinary course of the business.

The above comments are an expression of opinion only and are not binding on the Department; nevertheless we hope this will be of assistance.

Yours truly,

for DirectorFinancial Industries DivisionRulings Directorate