13 January 1993 Income Tax Severed Letter 9233955 - Reorganization of Share Capital—Rights Offering

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.

5-923395
XXXXXXXXXX D. S. Delorey
(613) 957-8953

Attention: XXXXXXXXXX

January 13, 1993

Dear Sirs:

This is in reply to your letter of November 4, 1992 asking if we view a rights offering as being a "reorganization of share capital of the corporation" as contemplated in paragraph 110(1.5)(b) of the Income Tax Act (the "Act"). Your enquiry appears to relate to a proposed transaction. Written confirmation of the tax implications inherent in a proposed transaction is given by this Directorate only where the proposed transaction is the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R2. We offer, however, the following general comments.

Whether or not the issuance of additional shares of a corporation pursuant to a rights offering would be a reorganization of share capital of the corporation would normally be determinable only after the fact on a case-by- case basis. Accordingly, such a determination would normally be made by the relevant district taxation office. However, generally speaking, it is our view that where a corporation's existing capital structure provides for it, the issuance of additional shares by the corporation would not of itself be such a reorganization whether the additional shares are issued pursuant to a rights offering or otherwise. In this regard, we note that one of the meanings given to the word "reorganization" in Black's Law Dictionary is:

• "General term describing corporate ......readjustments occurring, for example,......when...... a corporation makes a substantial change in its capital structure".

Although, as indicated above, such a determination would normally be made after the fact by a district taxation office, we are prepared to consider any further representations you wish to make in this regard to support an advance ruling request submitted in the manner set out in Information Circular 70-6R2.

With regard to determining the fair market value of a property for the purposes of paragraph 110(1)(d)(iii) of the Act, we can only say that the fair market value of a property at particular time is a question of fact. A well accepted definition of "fair market value" is that contained in Black's Law Dictionary, 6th edition, which reads as follows:

• "the amount at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of the relevant facts".

Because it is a question of fact, the Department does not provide advance rulings on the fair market value of a property nor does it as a general rule predetermine the fair market value of a property in any other context. We would not, therefore, as a general rule express an opinion on the reasonableness of a method proposed to be used in arriving at the fair market value of a property at a particular point in time. The Department would become involved only after the fact and only if it considered the value assigned to a property to be unreasonable in the circumstances. Our comments are an expression of opinion only and are not binding on the Department as explained in paragraph 21 of Information Circular 70-6R2. We trust, however, that they are of assistance.

Yours truly,

for Director
Financial Industries Division
Rulings Directorate