21 August 1992 Income Tax Severed Letter 9215055 - Prescribed 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.

921505
24(1) S. Leung
(613) 957-2115

Attention: 19(1)

August 21, 1992

Dear Sirs:

Re: 24(1)
Advance Income Tax Ruling Request

We are writing in response to your letter of March 22, 1992 wherein you requested an advance income tax ruling confirming that clause 6205(1)(a)(i)(B) of the Income Tax Regulations (the "ITR") would apply such that the Class A Special shares of 24(1) would not be considered to be prescribed shares for the purposes of subsection 110.6(8) of the Income Tax Act (the "Act") and whether the Class A and Class B Special shares of 24(1) would otherwise be considered to be prescribed shares for such purposes.

As discussed during the telephone conversation of May 21, 1992 between 19(1) of your firm and S. Leung of this Directorate, we are unable to issue an advance income ruling with respect to such matters since your ruling request does not describe any seriously contemplated transactions. In addition, the issue of whether the Class A and Class B Special shares of 24(1) are prescribed shares relates to transactions which have already been completed.

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As stated in paragraph 6 of Information Circular 70-6R2, dated September 28, 1990, advance rulings are only issued in respect of seriously contemplated transactions and are not issued in respect of completed transactions. As the situation outlined in your letter is an actual situation involving completed transactions and identifiable taxpayers, the responsibility for determining the tax consequences relating to such transactions rests with the appropriate district taxation office. You should, therefore, contact them for advice and assistance. However, we can offer the following general comments.

The pertinent facts provided in your letter of March 22, 1992 are as follows:

24(1)

Our comments

In order to qualify as a prescribed share for the purposes of subsection 110.6(8) of the Act, subsection 6205(1) of the ITR requires, inter alia, that at the time the share is issued, the amount (the "liquidation entitlement") that the holder of the share is entitled to receive on the share on the dissolution, liquidation or winding-up of the corporation is not limited to a maximum amount or fixed at a minimum amount by way of a formula or otherwise. It is, therefore, our general view that if the holder of the share is entitled to a fixed preferential liquidation entitlement, no matter how small, the share would not be a prescribed share for the purposes of subsection 110.6(8) of the Act.

Also, in order to qualify as a prescribed share, clause 6205(1)(a)(i)(G) of the ITR requires that neither the corporation nor any specified person in relation to the corporation has, either absolutely or contingently, the right or obligation to redeem, acquire or cancel at the time the share is issued or at any time thereafter, the share in whole or in part, except where the redemption, acquisition or cancellation is required pursuant to a conversion that is not prohibited by clause 6205(1)(a)(i)(C) of the ITR.

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In view of the fact that 24(1) may purchase the Class A Special shares as described in 3 above, it is our view that the Class A Special shares of 24(1) would not be considered to be prescribed shares for the purposes of subsection 110.6(8) of the Act. As the right to purchase the Class A Special shares by 24(1) is included in the terms and conditions of the shares, rather than by a separate agreement, the relief provided in paragraph 6205(4)(d) of the ITR would not be applicable. The above comments are also relevant with respect to the Class B Special shares of 24(1). However, the relief provided in paragraph 6205(4)(f) of the ITR may be applicable if these shares were issued pursuant to an employee share purchase agreement and all the other conditions of that paragraph are met.

We trust that these comments will be of assistance.

Yours truly,

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

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