19 August 1997 External T.I. 9720745 - PRESCRIBED SHARES, 110(1)(D), PRIVATIZATION

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:

Would a section 7 benefit in the case where a public corporation wants to become a private corporation by redeeming the shares held by minority shareholders be eligible for the 110(1)(d) deduction?

Position:

No

Reasons:

Shares would not be prescribed shares as required under 110(1)(d)(ii).

972074
XXXXXXXXXX M.P. Sarazin

Attention: XXXXXXXXXX

August 19, 1997

Dear Sirs:

Re: Paragraph 110(1)(d) and Disposition of Rights

This is in reply to your letter dated July 28, 1997, wherein you requested our views on the application of paragraph 110(1)(d) of the Income Tax Act (the "Act") in the situation where a public corporation, in the process of being privatized, acquired the stock option rights held by its employees for their fair market value.

In your letter you have outlined what appears to be an actual fact situation related to a past transaction. The review of such transactions falls within the responsibility of tax services offices and it is the practice of this Department not to comment on such transactions when the identities of the taxpayers are not known. However, we can provide you with the following general comments which we hope will be of assistance.

In order to be a prescribed share for the purposes of subparagraph 110(1)(d)(ii) of the Act, the provisions of paragraph 6204(1)(b) of the Income Tax Regulations clearly provide that the corporation or a specified person in relation to the corporation cannot reasonably be expected to, within two years after the time the share is sold or issued, redeem, acquire or cancel such shares. This condition would not be satisfied in the situation where an employee is allowed to exercise his or her stock option so that the shares could, immediately thereafter, be tendered to the corporation. Consequently, any benefit under section 7 of the Act would not be eligible for the deduction under paragraph 110(1)(d) of the Act because the shares would not be a prescribed share for the purposes of subparagraph 110(1)(d)(ii) of the Act.

The question as to whether the section 7 benefit in the above situation was intended to be eligible for the deduction under paragraph 110(1)(d) of the Act involves a matter of tax policy and, therefore, should be directed to the Department of Finance which is responsible for the formulation of tax policy.

We trust the above comments will be of assistance to you.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch