3 June 1997 External T.I. 9229905 F - Benefit, Refreeze

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.

PRINCIPAL ISSUES:

Is a benefit conferred on the common shareholders when a re- freeze in undertaken

POSITION: 

No.

REASONS:

Review Committee decision taken regarding same question in file #5-960763.

XXXXXXXXXX

Attention:  XXXXXXXXXX

Dear Sirs:

Re:  "Re-freezing" preferred shares issued in an estate freeze

We are writing in response to your letter of October 1, 1992 wherein you requested our comments on the Department's position as stated in the response to question 53 at the Revenue Canada Round Table discussion at the 1985 Annual Conference of the Canadian Tax Foundation (the "1985 Round Table").  The Department's position was that generally a benefit will be conferred upon the common shareholders where preferred shares, which have declined in value since being issued in an estate freeze, are converted into a new class of preferred shares having a redemption amount equal to the present fair market value ("FMV") of the original preferred shares.  The conversion would take place either by way of a share-for-share exchange under section 86 of the Income Tax Act 1 or a transfer under subsection 85(1) to a new holding company the common shares of which are not owned by the transferor.  We apologize for the delay in our reply which was occasioned by our reconsideration of our position concerning such transactions.

Questions

•     Does the Department's position on the conferral of a benefit remain as stated at the 1985 Round Table ?

•     Would the reply to the above question remain the same if, prior to the conversion described above, the common shares of the "freeze" corporation are sold, at FMV, to either the holder of the preferred shares or the "freeze" corporation, thereby resulting in only one shareholder, and new common shares are then issued to the former common shareholders ?

Replies

•     Recently we have had occasion to reconsider our position as described in the response to question 53 at the 1985 Round Table.  Accordingly, provided that the decrease in value of the preferred shares in this type of transaction is not the result of the stripping of corporate assets, we would not ordinarily consider a benefit to have been conferred on the common shareholders or the preferred shareholder on the exchange by the preferred shareholder of his or her original preferred shares for new preferred shares having a FMV equal to the present FMV of the original preferred shares.

•     It is our view that a benefit would generally not be considered to have been conferred in this situation.

The foregoing comments are given in accordance with the practice referred to in paragraph 22 of Information Circular 70-6R3 dated December 30, 1996 and are not binding on Revenue Canada.

Yours truly

for DirectorReorganizations and International DivisionIncome Tax Rulings and Interpretations DirectoratePolicy and Legislation Branch

ENDNOTES

1       All statutory references in this letter are to the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.) c. 1, as amended.