3 November 1997 External T.I. 9725615 - INCREASE IN INTEREST

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.

	                            	972561
XXXXXXXXXX                                  T. Harris
(613) 957-2114 

Attention: XXXXXXXXXX

November 3, 1997

Dear Sirs:

This is in reply to your letter of September 16, 1997, in which you requested our interpretation on the meaning of “a significant increase...in the total direct interest” in a corporation for the purposes of the proposed amendments to subparagraph 55(3)(a)(ii) and (iv) of the Income Tax Act (the "Act") which were contained in Bill C-69.

You have described a hypothetical situation involving Opco, a taxable Canadian corporation, which has three classes of issued and outstanding shares, being Class A Preferred Shares, Class B Preferred Shares and Common Shares. The Class A and Class B Preferred Shares of Opco are non-voting, non-participating, fixed value shares which carry a non-cumulative dividend rate. The Class A Preferred Shares rank in priority to the Class B Preferred Shares.

Holdco is a taxable Canadian corporation which owns 45% of the issued and outstanding Class B Preferred shares of Opco which it acquired many years ago. Holdco’s acquisition of the Class B Preferred shares of Opco was not part of the series of transactions which will include their redemption. Holdco is not related to the persons who own the issued and outstanding Class A Preferred Shares, the Common Shares or the remaining 55% of the Class B Preferred Shares of Opco.

Opco redeems the Class B Preferred Shares of Opco owned by Holdco. You have asked us to assume that the paid-up capital and adjusted cost base of the Class B Preferred Shares of Opco is nominal and that their redemption price is significant.

For purposes of this letter, you have also asked us to assume that Holdco is related to Opco for the purposes of section 55 of the Act.

Our Comments

The situation described in your letter would appear to involve an actual proposed transaction. Assurance as to the tax consequences of actual proposed transactions will only be given in the context of an advance income tax ruling. The procedures for requesting an advance income tax ruling are outlined in Information Circular 70-6R3 dated December 30, 1996 issued by Revenue Canada, Customs, Excise and Taxation. However, we can offer the following comments which we hope will be of assistance to you.

In circumstances where no person has acquired any shares of the corporation in question, it is our view that for the purposes of determining whether there has been “a significant increase...in the total direct interest” of an unrelated person in the corporation for the purposes of the proposed amendments to subparagraph 55(3)(a)(ii) and (iv) of the Act that one must compare the value of a person’s interest in the corporation as a percentage of the value of all interests in the corporation immediately before the share redemption to the value of that person’s interest in the corporation as a percentage of the value of all interests in the corporation immediately after the share redemption. Since, in the hypothetical situation referred to above, you have asked us to assume that the value of the Class B Preferred Shares of Opco owned by Holdco is significant, we believe that the other shareholders of Opco will significantly increase their total direct interest in Opco as a result of the redemption of the shares held by Holdco. As Holdco is not related to any of the other Opco shareholders, paragraph 55(3)(a) will not apply to exempt the dividend received by Holdco on the redemption of its Opco shares from the application of subsection 55(2) of the Act.

The foregoing comments represent our general views with respect to the subject matter of your letter. These comments are provided in accordance with the guidelines described in paragraph 22 of the aforementioned Information Circular.

Yours truly,

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