25 November 1992 External T.I. 9228820 F - Poison Pills Warrants Investments RRSP

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.

1992 Canadian Tax Foundation Conference

Rights to Acquire Shares at Undervaluation

Question 51

Many Canadian companies have adopted poison pills. Under these arrangements, the shareholders may be granted a right to acquire additional shares of the company at, say, one-half of market value. These rights trade in tandem with the common shares until an improper take-over bid occurs. In that event, the rights become severable from the shares and trade separately. The person or group of persons making the improper take-over bid is not allowed to exercise any of these special rights.

(a)     Does the exception in paragraph 15(1)(c) of the Act apply so that no shareholder will be considered to receive a benefit at the time the rights are issued?

(b)     Would the exercise of the right be treated in the same way as the exercise of an option to acquire shares?

(c)     Will the rights be considered qualified property for RRSPs prior to the time that they trade separately from the shares?

Department's Position

1.     Paragraph 15(1)(c) provides that when a right to buy additional shares of a corporation is conferred on all owners of its common shares, no amount or value is thereby included in computing the shareholders' income. Generally this will be the case when warrants are issued as part of a "poison pill". However, if at the time of the issue, it is known that certain shareholders will not exercise their rights or will not be entitled to exercise their rights, the Department will take the view that the rights were not conferred on all shareholders and that the exception provided in paragraph 15(1)(c) will not apply.

2.     A warrant issued as a "poison pill" is a form of option and is subject to the same provisions as any other option to acquire shares.

3.     Pursuant to paragraph 4900(1)(e) of the Regulations, a warrant or right to acquire shares is not a qualified investment for an RRSP unless it is listed on the Toronto Futures Exchange or a prescribed stock exchange in Canada. A "poison pill" warrant, acquired with a share and as a unit would not generally be able to meet this requirement of the law since it cannot normally be severed from the share and thus cannot itself be listed. This, of course, would only be of significance in cases where the "poison pill" warrant has a value. It is our understanding that this is not usually the case.