24 November 1993 External T.I. 9331475 - Surplus Pot Shares — Disposition

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.

Attention: XXXXXXXXXX

November 24, 1993

Dear Sirs:

Re: Clause 54(c)(ii)(A) of the Income Tax Act (Canada)(the "Act")

This is in reply to your letter dated October 26, 1993 wherein you requested our comments as to whether or not the elimination of a share's right to an automatic allocation of corporate profits would result in a disposition of such share under clause 54(c)(ii)(A) of the Act in the following situation.

A corporation has several classes of common shares which are issued and outstanding. Each class of shares has the right to share in an equal allocation of the corporation's profits. However, this right does not require that the profits so allocated be paid out in dividends, nor does it require that dividends be cumulative. The shares are normally referred to as "surplus pot shares".

You are of the view that the elimination of the automatic allocation of the corporation's profits between classes of common shares would not result in a disposition, pursuant to clause 54(c)(ii)(A) of the Act, of the corporation's shares by each holder of such shares. In your view the proposed change is not "of sufficient substance to be regarded as a disposition" as described in paragraph 14 of Interpretation Bulletin IT-448. In addition, the proposed change will not affect the voting rights of the shares, nor will it affect each share's entitlement upon the dissolution of the corporation.

Our Comments

It appears that the interpretation you seek relates to a proposed transaction to be undertaken by a specific taxpayer and, therefore, we bring to your attention Information Circular 70-6R2 dated September 28, 1990 and the Special Release thereto dated September 30, 1992, issued by Revenue Canada, Customs, Excise and Taxation. Confirmation with respect to proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. If you wish to obtain an advance income tax ruling for a particular taxpayer with respect to specific transactions which are contemplated, a written request for an advance income tax ruling can be submitted in accordance with the Information Circular. Nevertheless, we can offer the following general comments.

The determination of whether a change in the rights attached to a particular share may be sufficient to be regarded as a disposition is a question of fact which can only be decided after a review of all of the circumstances of each particular case. The Department's general views on this subject are set out in IT-448. For example, if as indicated in paragraph 2 of IT-448, the amendment to the share's terms involves a cancellation of the share, then by virtue of clause 54(c)(ii)(A) of the Act, the shareholder will be considered to have disposed of the share.

If it is determined that the elimination of the right to the automatic allocation of the corporation's profits results in a disposition of the shares, the provisions of subsection 86(1) of the Act may apply to such disposition provided the shares represent capital property to their holders.

The foregoing comments are given in accordance with the guidelines set out in paragraph 21 of Information Circular 70-6R2.

Yours truly,

for DirectorReorganizations and Foreign DivisionRulings Directorate Legislative and Intergovernmental Affairs Branch