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.
XXXXXXXXXX Marc Ton-That
June 27, 1995
Re: Paragraph 15(1)(c) of the Income Tax Act (the "Act")
Further to our telephone conversation of June 27, 1995, we are writing in reply to your letter (copy attached, as requested) wherein you requested our opinion on the application of paragraph 15(1)(c) of the Act to the following situation:
A Canadian resident public corporation ("Canco") wishes to raise additional capital by issuing a defined number of common shares to the current holders of its outstanding common shares.
To do so, Canco will make a rights offering and will issue to all holders of common shares rights to purchase a certain number of additional common shares (the "rights") of Canco which is in proportion to their shares already held in Canco (the "first stage subscription").
Each holder of common shares who has fully exercised his rights in the first stage subscription will be allowed to purchase his prorata share of common shares not taken up by the other shareholders (the "second stage subscription").
The majority shareholder of Canco has also entered into an agreement with Canco to purchase any of the shares not purchased by the other shareholders of Canco pursuant to the first stage subscription and the second stage subscription of the rights offering (the "third stage subscription").
Since Canco does not want to comply with the prospectus requirements to issue shares to United States resident shareholders, these will be prevented from exercising their rights. Hence, the rights of a United States resident shareholder will be issued to a trustee which will arrange for their sale and the distribution of proceeds from the sale to the United States resident shareholder. Therefore, a United States resident shareholder will also be prevented from acquiring additional common shares pursuant to the second stage subscription. However, a purchaser of the rights from a United States resident shareholder who fully exercises his rights in the first stage subscription will be allowed to exercise his privilege in the second stage subscription.
Since paragraph 15(1)(c) of the Act has been amended to require that a right conferred on all owners of common shares at a certain time in respect of each common share be identical to every other right conferred at that time in respect of each other such share, you have asked whether Revenue Canada's position expressed in paragraph 2 of the Interpretation Bulletin IT-116R2 will remain the same.
Paragraph 2 of IT-116R2 partly reads as follows: "Where rights to buy additional shares are issued by a Canadian corporation it may be that certain non-resident shareholders are barred from subscribing for such shares. This situation may be caused by restrictions in a Canadian law or because the corporation did not comply with the securities regulations in the country where the non-resident shareholders reside. In these circumstances, paragraph 15(1)(c) is still considered to apply provided that rights are in fact issued to the non-resident shareholders and they are entitled to sell such rights."
Provided that the rights issued to the non-resident shareholders are identical to the rights issued to the other shareholders, the position expressed in IT-116R2 remains valid. The fact that the rights are issued to a trustee which will arrange for their sale does not change their nature.
However, we are of the view that the rights issued to the shareholders as described in the above situation are not all identical. The third stage subscription right confers on the majority shareholder a right which is not available to the other shareholders. Subsection 15(1) would apply in such circumstances to the extent of the benefit conferred on the shareholder.
We trust the above comments will be of assistance.
As stated in paragraph 21 of Information Circular 70-6R2 dated September 28, l990, the opinions expressed in this letter are not rulings and are consequently not binding on the Department.
Reorganizations and Foreign Division
Income Tax Rulings and
Policy and Legislation Branch
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