18 April 1994 External T.I. 9321115 - TAXABLE PREFERRED SHARES

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.

Principal Issues:

Employee Share Purchase Plan - Can Terms of agreement cause shares to be Taxable Preferred Shares

Position TAKEN:

Yes it is possible

Reasons FOR POSITION TAKEN:

Question of fact and law

		932111
XXXXXXXXXX	M. Cooke

Attention: XXXXXXXXXX

April 18, 1994

Dear Sirs:

Re: Taxable Preferred Shares ("TPS")

This is in reply to your letter of July 12, 1993, in which you requested our comments with respect to the definition of TPS, as described in subsection 248(1) of the Income Tax Act (the "Act"). We apologise for the delay in our response.

You have asked that we confirm that paragraph (f) of the definition of TPS applies to a class of shares which would not otherwise be considered to be TPS but for the terms of an employee share purchase agreement (the "ESP Agreement"). Such a determination can only be made based on a complete review of all the facts, circumstances and particular documentation on submission of a request for an income tax ruling. Nevertheless, we set out below our general comments on certain interpretation issues raised in your letter.

It is our understanding that under the terms of a typical ESP Agreement the employer has the right (the "option") to reacquire all, or a portion of, an employee's shares for an amount equal to the lesser of their fair market value ("FMV") or their acquisition cost to the employee. In some cases, the agreement provides for the determination of FMV at the time notice is given rather than at the time the shares are actually acquired. We also understand that the employer may exercise this option only within a limited time period and only under certain defined circumstances.

As you point out these shares would be described in subparagraph (b)(ii) of the TPS definition unless the relieving provision of subparagraph (f)(ii) of the TPS definition applies. The application of subparagraph (f)(ii) is a question of fact which can only be determined after reviewing all of the facts of a particular situation as reflected in the documents.

Our foregoing comments are provided pursuant to the practice referred to in paragraph 21 of Information Circular 70-6R2, are not advance rulings and are not binding on the Department in respect of any transaction or taxpayer.

Yours truly,

for Director
Financial Industries Director
Rulings Directorate