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. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
1992 Canadian Tax Foundation Conference
Author: K. Donnelly
November 25, 1992
Exchange of Securities - Allocation of Cost
Question 9
IT-96R5 appears to state that if a company issues a security which is exchangeable for a security of another issuer, then an allocation must be made between the cost of the security being issued and the cost of the right to make the exchange. It is rumoured that Revenue Canada has given private opinions to the contrary,i.e., that no allocation need be made. What is the Department's position ?
Answer 9
The Department's interpretation set out in paragraph 6 of IT-96R5 may be misleading due to it's positioning under the introductory heading "OPTION TO ACQUIRE THE GRANTING CORPORATION'S OWN CAPITAL STOCK, BONDS OR DEBENTURES". It could be concluded that the Department's position in paragraph 6 of IT-96R5 does not apply to "OPTIONS TO ACQUIRE SECURITY OF ANOTHER CORPORATION", because this heading follows paragraph 6 of IT-96R5 .
Paragraph 6 of IT-96R5 under the caption, "Security with a conversion feature", states that "In the case of a security with a conversion feature which is not severable from the security and cannot be separately traded, no part of the issue price can be allocated to the conversion feature and, where the security is converted, no allocation of the proceeds of disposition between the conversion feature and the security can be made."
This position is identical to that set out in paragraph 3 of IT-96R4 . There has been no change in the Department's position. Paragraph 6 of IT-96R5 applies either where the non-severable conversion feature entitles the security holder to convert into a security of the issuing corporation or to exchange for a security of another corporation. A future revision of IT-96R5 will correct the apparent uncertainty on this matter.
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