8 February 1995 External T.I. 9421285 - CONTINGENT RIGHT TO ACQUIRE 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:

Does the right to convert non-voting shares to voting shares result in a contingent right to acquire control of a corporation within the meaning of paragraph 251(5)(b) where control can only be acquired if another shareholder does not exercise his right to convert as well?

Position TAKEN:

Yes.

Reasons FOR POSITION TAKEN:

For the purposes of determining whether a shareholder is related to the corporation it is our view that paragraph 251(5)(b) would generally ignore the contingent rights of other unrelated shareholders.

		942128
XXXXXXXXXX	A. Seidel

Attention: XXXXXXXXXX

February 8, 1995

Dear Sirs:

Re: Paragraph 251(5)(b) of the Income Tax Act

This is in reply to your letter dated August 16, 1994 wherein you requested our views as to whether two corporations would be related to each other by virtue of paragraph 251(5)(b) of the Income Tax Act (the "Act").

The situation described in your letter appears to relate to an actual fact situation. To the extent that you require assistance in determining the current tax status of the taxpayers involved, you should contact your District Taxation Office. To the extent that you require confirmation of the tax consequences of proposed transactions, your request should be the subject of a request for an advance income tax ruling. However, we can provide you with the following general comments which may be of some assistance. Our comments are based on the hypothetical situation where the current shareholdings of Opco are as follows:

Class A Voting Class B Non-voting
Shareholder # % # % % of Equity
A 450 10% 4,125 75% 45.75%

B 1,125 25% 1,375 25% 25.0%

C 1,350 30% 13.5%

D 1,350 30% 13.5%

Other 225 5% 2.25%

On the happening of certain possible future events, Shareholder A has the option to convert any number of its Class B non-voting shares into an equal number of Class A voting shares. In the event that Shareholder A converts any of its Class B non-voting shares into Class A voting shares, Shareholder B may then convert a proportionate number of its Class B non-voting shares into an equal number of Class A voting shares. In addition, in the event that Shareholder A converts any of its Class B non-voting shares into Class A voting shares, it must bid for all other Class A voting shares at a price based on an independent valuation.

Whether or not a person has a right to acquire the shares of the capital stock of a corporation or to control the voting rights of such shares within the meaning of paragraph 251(5)(b) of the Act is a question of fact which can only be determined after a review of all of the relevant facts.

In the situation described, for the purposes of determining whether Shareholder A and Opco are related, paragraph 251(5)(b) would apply to deem Shareholder A to have the same position in relation to the control of Opco as if it had exercised its conversion right. If Shareholder A were to exercise its contingent right to convert its non-voting shares of Opco into additional voting shares while Shareholder B did not exercise its conversion right, Shareholder A would own more than 50% of the voting shares of Opco. Since paragraph 251(5)(b) refers to contingent rights, we believe that, for the purposes of determining whether Shareholder A and Opco are related, the proper interpretation to be given to that paragraph is to consider the position of Shareholder A on the assumption that Shareholder B has not exercised its contingent right to also convert its non-voting shares of Opco into additional voting shares thereof.

With respect to the requirement that Shareholder A bid to acquire the voting Class A shares of Opco held by the other shareholders in the event that it exercises its contingent conversion right, it is our view that such requirement would not represent a contingent right described in paragraph 251(5)(b) of the Act provided that the other shareholders are not required to tender their shares to the bid.

These comments are provided in accordance with the guidelines set out in paragraph 21 of Information Circular 70-6R2 and are not binding on Revenue Canada, Customs Excise and Taxation.

Yours truly,

for Director
Reorganizations and Foreign Division
Rulings Directorate
Policy and Legislation Branch