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:
Whether an exchange of shares pursuant to section 85(1) of the Act constitutes a "disposition" for purposes of section 54 of the Act.
Position TAKEN:
yes.
Reasons FOR POSITION TAKEN:
The definition of "disposition" is very broad and would appear to include an exchange of shares under the Nova Scotia Companies Act.
October 17, 1995
Halifax Tax Services Office Corporate
Reorganizations III
A. Seidel
Attention: Kevin McGuigan
Audit Services
951787
Disposition of Shares
This is in reply to your facsimile dated July 10, 1995 and your additional submissions dated July 12 and August 15, 1995 wherein you requested our opinion as to whether we would consider the exchange of a voting share for a non-voting share pursuant to subsection 85(1) of the Income Tax Act (the "Act") to be a "disposition" within the meaning of section 54 of the Act.
The determination of whether or not a share has been disposed of for tax purposes is a question of fact which can only be determined after a review of all of the relevant documentation related to the transaction. The following general comments may be of assistance to you.
Paragraph 14(a) of Interpretation Bulletin IT-448 ("IT-448") states that a change in the voting rights attached to shares that effects a change in the voting control of the corporation is a change that is considered to be of sufficient substance to be regarded as a disposition of those shares. By corollary, the Department has also taken the position that the deletion of voting rights which does not effect a change in the control of a corporation does not substantially alter the relative rights and entitlements of the shareholders of the corporation and therefore will not result in a disposition of such shares.
Subsection 85(1) of the Act applies "where a taxpayer has, in a taxation year, disposed of any of the taxpayer's property" (underlining added).
In The Queen v. Compagnie Immobilière BCN Ltée. 79 DTC 5068 (S.C.C.) Mr. Justice Pratt made the following comments with respect to the meaning to be given to "disposition" at p. 5073:
"The verb "to dispose" has a very broad meaning; it is defined as follows in the Oxford English Dictionary (see To dispose of):
b. To put or get (anything) off one's hands; to put away, stow away, put into a settled state or position; to deal with (a thing) definitely; to get rid of; to get done with, settle, finish. In recent use sometimes spec. to do away with, "settle", or demolish (a claim, argument, opponent, etc.); also humorously, to make away with, consume (food).
The substantive definitions of "disposition of property" and "proceeds of disposition" in s. 20(5)(b) and (c) are a clear indication that the words "disposed of" should be given their broadest possible meaning...
In discussing the jus abutendi which is one of the three main attributes of the right of ownership, Mignault (Droit civil canadien, vol. 2, at p. 477) wrote: ...
(TRANSLATION)
The jus abutendi, or right of disposal, is the right to make some final use of the thing, which will not be repeated, at least for the same person. Disposing of a thing means transforming, consuming, destroying or, finally, alienating it, that is, transferring it to another person."
XXXXXXXXXX
Provided, therefore, that the taxpayer's have in fact taken the necessary steps required to satisfy the terms of the Agreement, it is our view that the exchange of the voting share for a non-voting share is legally effective for purposes of subsection 85(1) of the Act.
Paragraphs 51(1)(a) and (e) of the Nova Scotia Companies Act (the "NSCA") respectively provide that a company, if so authorized by its articles, may "increase its share capital by the creation of new shares of such amount as it thinks expedient" and may "exchange shares of one denomination for another". In this particular case, the Class A and Class B shares would be created pursuant to paragraph 51(1)(a) of the NSCA followed by the exchange of the issued voting common share for a non-voting Class A share and the exchange of the unissued common shares to Class B shares pursuant to paragraph 51(1)(e) of the NSCA.
The definition of "exchange" in Black's Law Dictionary includes the following: "act of giving or taking one thing for another", "contract by terms of which specific property is given in consideration of receipt of property other than money" and "transaction in which one piece of property, usually something other than money or its equivalent, is given in return for another piece of property". Accordingly, an "exchange" of a share within the meaning of paragraph 51(1)(e) of the NSCA would constitute a "disposition" as defined above.
An exchange of shares pursuant to paragraph 51(1)(e) of the NSCA appears to be the type of transaction to which the provisions of sections 51 and/or 86 of the Act were intended to apply. Section 51 of the Act requires that a share be acquired in exchange for consideration consisting of another share which would be indicative of a disposition; while section 86 requires that the share be disposed of. This would suggest that an exchange under paragraph 51(1)(e) of the NSCA should be considered a disposition for tax purposes.
Based on the above, it is our view that the exchange of the voting common share of XXXXXXXXXX for a non-voting common share would be a "disposition", within the meaning of section 54 of the Act, of the voting share.
We trust our comments will be of assistance.
Chief
Corporate Reorganizations III Section
Reorganizations and Foreign Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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