20 February 1996 External T.I. 9605085 - STOCK DIVIDEND SHARES THOSE OF A SPECIFIED CLASS?

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 shares issued as a stock dividend would meet the definition of shares of a specified class

Position:

No.

Reasons:

Stock dividend shares would be considered to be issued for NIL consideration, but by their nature are redeemable for more than NIL

		960508
XXXXXXXXXX	V. Plant
(613) 957-2120
Attention:  XXXXXXXXXX

February 20, 1996

Dear Sirs:

Re: Definition of specified class

This is in reply to your facsimile of January 31, 1996 to the Vancouver Tax Services Office, Business Enquiries, which was forwarded to us for reply.

You are requesting our opinion whether a particular class of share would meet the definition of a "specified class" in subsection 256(1.1) of the Income Tax Act (the "Act"). The share in question is a high-low share issued as a stock dividend (ie. high redemption value, low paid-up capital and low adjusted cost base).

Our comments

It appears that the interpretation you seek relates to a proposed transaction to be undertaken by specific taxpayers 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. Where, however, the issue to be considered involves a question of fact, the Department will not rule unless all of the relevant facts are known. Nevertheless, we can offer the following general comments.

Our opinion is that where a share has been issued as a stock dividend, the consideration for which the share was issued would be NIL, which is relevant in determining whether the conditions in paragraphs 256(1.1)(c), (d) and (e) of the Act, which refer to "an amount equal to the fair market value of the consideration for which the shares were issued" are met. For example, in paragraph 256(1.1)(e) of the Act, "the amount that any holder of the shares is entitled to receive...cannot exceed the total of an amount equal to the fair market value of the consideration for which the shares were issued and the amount of any unpaid dividends thereon." Since the redemption amount of a preferred share issued as a stock dividend would be greater than NIL, then the shares issued as a stock dividend do not meet this test and would not constitute shares of a specified class.

You have asked whether our view would be any different if the act of issuing the Class B preferred shares as a stock dividend on the Class A shares caused the aggregate redemption value of the Class A preferred shares to be reduced by the aggregate redemption value of the class B preferred shares?

Our response would not change since we would still consider that the Class B preferred shares were issued for NIL consideration.

We trust you will find our comments helpful.

Yours truly,

for Director
Reorganizations and Foreign Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch