6 November 1997 External T.I. 9718385 - SPECIAL WARRANTS

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 special warrants are considered to be shares for purposes of subsection 85.1(1)

Position:

unable to give a definitive opinion

Reasons:

we would need to review all the relevant documentation.

971838
XXXXXXXXXX F. Francis

Attention: XXXXXXXXXX

November 5, 1997

Dear Sirs:

Re: Subsection 85.1(1) of the Income Tax Act (the "Act").

This is in reply to your letter of July 4, 1997, wherein you requested our comments with respect to the application of the provisions of subsection 85.1(1) of the Act to the following situation.

You describe a hypothetical situation whereunder a taxpayer (the "Vendor") owns shares of a taxable Canadian corporation which represent capital property to the Vendor. The Vendor sells the shares to a Canadian corporation (the "Purchaser") and receives Special Warrants issued by the Purchaser as consideration.

The terms of the Special Warrants provide that:

1.On exercise thereof, the Vendor will be entitled to receive 1 common share of the Purchaser without payment of any additional consideration.

2. If a receipt for prospectus qualifying the distribution of the common shares issuable on the exercise of the Special Warrants is not obtained by a specified date (the "Qualification Date"), on the exercise of a Special Warrant after the Qualification Date, the Vendor will be entitled to receive 1.1 common shares of the Purchaser.

3.If the Special Warrants are not exercised by a specified date (which date will be later than the Qualification Date), any unexercised special warrants will be deemed to be exercised.

You have asked us to confirm that the Special Warrants issued by the Purchaser to the Vendor would not be considered to be shares of the Purchaser for the purposes of subsection 85.1(1) of the Act.

In our view, it is not possible to comment upon whether such special warrants would constitute a share of the capital stock of the corporation for purposes of subsection 85.1(1) of the Act without a review of all of the terms of the particular special warrant in question and of the circumstances in which the special warrant arises.

If you have a concern with regards to contemplated transactions involving Special Warrants we would be pleased to consider this in the context of a request for an advance income tax ruling. On the other hand, if you have a concern with regards to completed transactions involving Special Warrants such matter should be referred to the relevant Tax Services Office.

Yours truly,

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