15 June 1993 Income Tax Severed Letter 9317025 - Shareholder Benefit

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.

Question 37: Shareholder Benefit

Assume the following facts:

1. Opco is a Canadian-controlled private corporation carrying on an active business in Canada.

2. All of Opco's shareholders deal at arm's length with Opco and with each other.

3. Opco confers on all its common shareholders rights to purchase 1,000 additional common shares at a price of $1 per share.

At the time of the rights issuance, Opco's common shares have a fair market value of $5 per share.

5. Some, but not all, of the common shareholders of Opco are employees of Opco.

Questions

A. Will paragraph 15(1)(c) preclude the assessment of a shareholder benefit in respect of the issuance of rights to purchase additional common shares?

B. Notwithstanding the possible application of paragraph 15(1)(c) with respect to the rights issuance, would Revenue Canada consider a benefit of $4 per share right, for a total of $4,000 per shareholder, to be assessable against all common shareholders ?

Department's Response

A. Bill C-92, which received Royal Assent on June 10, 1993, amends paragraph 15(1)(c) to require that the corporation confer the identical right per common share on each common shareholder to acquire additional shares of the corporation. In addition, if at the time the rights are issued, it is known that certain shareholders will not exercise their rights or will not be entitled to exercise their rights, it is our view that the rights have not been conferred on all shareholders and the exception provided in paragraph 15(1)(c) will not apply.

B. A benefit would not ordinarily be assessed where paragraph 15(1)(c) exempts the benefit from the application of subsection 15(1). However, it is conceivable that another provision, such as section 6, 245 or 246, could apply in some circumstances, notwithstanding the application of paragraph 15(1)(c). Furthermore, the Department would consider assessing a benefit under subsection 7(1) to those shareholders who received their rights in their capacity as employees. However, where all shareholders, including those who are not employees, are given the identical right per common share to acquire additional shares, the rights given to employee-shareholders would not ordinarily be considered to have been received in respect of, in the course of, or by virtue of their employment, such that subsection 7(5) would apply to preclude the application of section 7.

Prepared by:      D. Yuen
Date:             June 15, 1993
Document:         Code 5
Sections:         15(1)(c)
Subject:          CPTS June 1993
T236:             5-931702