1998 Ruling 9802073 - BUTTERFLY REORGANIZATION

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 Gaar should apply to a series of transactions, one of the purposes of which is to avoid the application of subsection 129(6)

Position: In this instance, no

Reasons: As the corporations were not otherwise associated and the specific anti-avoidance rules in section 256 do not apply, it was decided that Gaar should not apply.

	xxxxxxxxxx	980207
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Attention: xxxxxxxxxx
xXXXXXXxxx, 1998
Dear Sirs:

Re: XXXXXXXXXX
xxxxxxxxxx

Advance Income Tax Ruling

This is in reply to your letter dated XXXXXXXXXX requesting an advance income tax ruling on behalf of the above-referenced taxpayers. In letters dated XXXXXXXXXX, certain amendments to the proposed transactions described in your original letter were provided. We also acknowledge the information provided during our various telephone conversations (XXXXXXXXXX).

All of the above-referenced taxpayers file their T2 Returns with the XXXXXXXXXX Taxation Centre.

To the best of your knowledge and that of the taxpayers involved, none of the issues involved in this request:

(a) is involved in an earlier return of the taxpayer or a related person

(b) is being considered by a tax services office or taxation centre in connection with a tax return already filed by the taxpayer or a related person,

(c) is under objection,

(d) is before the courts or, if a judgment has been issued, the time limit for appeal has not expired, and

(e) is the subject of a ruling previously issued by the Income Tax Rulings and Interpretations Directorate.

Definitions

In this letter the following terms have the meanings specified:

(a) "Act" means the Income Tax Act, chapter 1, R.S.C. 1985 (5th supp.), as amended as at the date hereof, and all references to a Part, section, subsection, paragraph, subparagraph or clause is a reference to the specified provision of the Act

All terms used herein that are specifically defined in the Act have such meaning unless otherwise specified;

(b) "Buy-sell Provisions" means the provisions of the shareholders' agreement summarized in paragraph 31 hereof

(c) "Distributing Corporation" means xxxxxxxxxx;

(d) "Distribution" means the transfer of property of the Distributing Corporation to each of the Transferee Corporations contemplated by paragraph 17 hereof;

(e) "Opco" means xxxxxxxxxx;

(f) "Principal" in relation to a Transferee Corporation means -

(i) in the case of Transferee 1, xxxxxxxxxx;

(ii) in the case of Transferee 2, XXXXXXXXXX;

(iii) in the case of Transferee 3 xxxxxxxxxx;

(iv) in the case of Transferee 4, xxxxxxxxxx;

(v) in the case of Transferee 5' xxxxxxxxxx;

(g) "RDTOH" means refundable dividend tax on hand;

(h) "Transferee 1" means XXXXXXXXXX;

(i) "Transferee 2" means XXXXXXXXXX;

(j) "Transferee 3" means XXXXXXXXXX;

(k) "Transferee 4” means XXXXXXXXXX;

(1) "Transferee 5" means XXXXXXXXXX;

(m) "Transferee Corporation" means any one of Transferee 1, Transferee 2, Transferee 3, Transferee 4 and Transferee 5.

Facts

1. Each Transferee Corporation is a taxable Canadian corporation and a Canadian-controlled private corporation and is indirectly controlled by its Principal. The Principals are resident in Canada and are brothers of each other.

2. The authorized share capital of each Transferee Corporation consists of an unlimited number of voting common shares and an unlimited number of each of six classes of non-cumulative, redeemable and retractable preference shares, referred to as Class A, B, C, D, E and F preferred shares. No Class E preferred shares of any Transferee Corporation are currently issued.

3. Each Transferee Corporation is directly controlled by a separate holding corporation, the shares of which are in turn owned by that Transferee Corporation's Principal.

4. In the cases of Transferee 1, Transferee 2, Transferee 3 and Transferee 4 a minority interest in common shares of the particular Transferee Corporation is held by a family trust, the beneficiaries of which are the children of the Principal of the particular Transferee Corporation.

5. The Distributing Corporation is a taxable Canadian corporation and a Canadian-controlled private corporation. Its assets consist principally of real property, all of which it holds as capital property. Most of its real property is leased to Opco, to which it is related and associated. Other of the Distributing Corporation's real property is leased to third parties. The rental operations of the Distributing Corporation do not constitute an active business; however, the income from the real property that is leased to Opco is subject to subsection 129(6). The Distributing Corporation's RDTOH balance as at the end of XXXXXXXXXX is anticipated to be $XXXXXXXXXX.

6. The authorized capital of the Distributing Corporation consists of an unlimited number of Class A voting common shares and Class B voting common shares and an unlimited number of each of five classes of voting, non-cumulative, redeemable and retractable preference shares.

7. The issued shares of the Distributing Corporation are legally and beneficially owned as follows:

Class of Shares 			Issued Shares
	   Shareholder

A common
Transferee 1			xxxxxxxxxx

Transferee 2			xxxxxxxxxx

Transferee 3			xxxxxxxxxx

Transferee 4			XXXXXXXXXX 

Transferee 5 xxxxxxx xxx

A preference
  Opco					XXXXXXXXXX 

B preference
	Transferee 1			XXXXXXXXXX 

Transferee 2			XXXXXXXXXX 

Transferee 3			XXXXXXXXXX 

Transferee 4			XXXXXXXXXX 

Brother 5						XXXXXXXXXX 

Brother 3						XXXXXXXXXX 

Brother 4						XXXXXXXXXX 

C	preference
Transferee 1				XXXXXXXXXX 

Transferee 2				XXXXXXXXXX 

Transferee 3				XXXXXXXXXX 

Transferee 4				XXXXXXXXXX 

Transferee 5				XXXXXXXXXX 

The XXXXXXXXXX Class A preference shares of the Distributing Corporation owned by Opco were issued in XXXXXXXXXX for $XXXXXXXXXX. The shares are redeemable for $XXXXXXXXXX and their paid-up capital and their adjusted cost base to Opco is $xxxxxxxxxx.

The XXXXXXXXXX issued and outstanding Class B preference shares of the Distributing Corporation are redeemable for $xxxxxxxxXX per share and have a paid-up capital and adjusted cost base to the holder of $XXXXXXXXXX per share.

The XXXXXXXXXX Class C preference shares of the Distributing Corporation are redeemable for $xxxxxxxXXX per share and have a paid-up capital and adjusted cost base to the holder of $xxxxxxxxxx per share.

The Class A, Class B and Class C preference shares of the Distributing Corporation are shares of a specified class within the meaning of subsection 55(1) of the Act.

8. Opco is a taxable Canadian corporation and a Canadian-controlled private corporation which carries on an active business in Canada. Its business consists of XXXXXXXXXX.

9. The authorized capital of Opco consists of an unlimited number of common shares and an unlimited number of each of six classes of non-voting, non-cumulative, redeemable and retractable preference shares. The Class A preference shares of any holder are convertible at the holder's option into any one of the other classes of preference shares.

1O.The issued shares of Opco consist of XXXXXXXXXX common shares, XXXXXXXXXX Class A preference shares and XXXXXXXXXX Class C preference shares. Each Transferee Corporation is the legal and beneficial owner of one-fifth of each of these classes of shares.

11.The taxation year of each Transferee Corporation, of the Distributing Corporation and of Opco ends on XXXXXXXXXX of each year.

Proposed Transactions

12. Brother 3 will transfer his XXXXXXXXXX Class B preference shares of the Distributing Corporation to Transferee 3 in consideration for a non-interest-bearing promissory note payable on demand having a principal amount and fair market value equal to the fair market value of the Class B preference shares so transferred.

13. Brother 4 will transfer his XXXXXXXXXX Class B preference shares of the Distributing Corporation to Transferee 4 in consideration for a non-interest-bearing promissory note payable on demand having a principal amount and fair market value equal to the fair market value of the Class B preference shares so transferred.

14. Brother 5 will transfer his XXXXXXXXXX Class B preference shares of the Distributing Corporation to Transferee 5 in consideration for a non-interest-bearing promissory note payable on demand having a principal amount and fair market value equal to the fair market value of the Class B preference shares so transferred.

Upon completion of these transfers, each of the Transferee Corporations will own 1/5 of the issued and outstanding Class B preference shares of the Distributing Corporation.

15 The XXXXXXXXXX Class A preference shares of the Distributing Corporation owned by Opco and the XXXXXXXXXX Class B preference shares and the XXXXXXXXXX Class C preference shares of the Distributing Corporation will then be redeemed at fair market value. The Distributing Corporation will pay the redemption price of $XXXXXXXXXX per share by issuing to Opco and each Transferee Corporation a non-interest-bearing promissory note, payable on demand, with a principal amount and fair market value equal to the total redemption price of the shares disposed of by it to the Distributing Corporation.

Upon completion of these redemptions the only issued and outstanding shares of the Distribution Corporation will be the XXXXXXXXXX Class A common shares, 1/5 of which will be owned by each Transferee Corporation.

16. Immediately before the transfers of property described in paragraph 17, the property of the Distributing Corporation will be classified into three types of property for the purposes of the definition of "distribution" in subsection 55(1), as follows:

(a) cash or near cash property, comprising all of the current assets of the Distributing Corporation, including any cash, prepaid expenses, income taxes recoverable and loans receivable from shareholders;

(b) investment property, comprising all of the assets of the Distributing Corporation, other than cash or near cash property, any income from which would, for purposes of the Act, be income from property or from a "specified investment business" (for these purposes the land, building and goodwill, if any, will be considered investment property); and

(c) business property, comprising all of the assets of the Distributing Corporation, other than cash or near cash property, any income from which would, for the purposes of the Act, be income from a business (other than a "specified investment business").

17. The Distributing Corporation will transfer to each Transferee Corporation 1/5 of all of its properties, On that transfer, each Transferee Corporation will receive:

(a) 1/5 of all of the Distributing Corporation's cash or near-cash property, and

(b) an undivided 1/5 beneficial interest in each parcel of real property owned by the Distributing Corporation.

The Distributing Corporation will not have any business property at the time of the transfers. For greater certainty, any tax accounts, such as the balance of any RDTOH, capital dividend account or balance of losses available for carryforward, of the Distributing Corporation will not be considered property for purposes of the proposed transactions described herein.

For greater certainty, the above transfers will be made on a gross fair market value basis rather than a net equity basis.

18. As consideration for the assets received by it on the Distribution, each Transferee Corporation:

(a) will assume 1/5 of all current liabilities and 1/5 of all long term liabilities of the Distributing Corporation, other than the liability of the Distributing Corporation under the promissory notes issued to the Transferee Corporations as described in paragraph 15; and

(b) will issue to the Distributing Corporation a number of redeemable and retractable Class E preference shares of its capital stock that will have a total redemption price and fair market value equal to the amount by which the total fair market value of the assets received by it exceeds the amount of the liabilities assumed by it in consideration for the transfer.

19. The redemption price of the Class E preference shares will be adjustable in the event that Revenue Canada determines the fair market value of the property received on the Distribution to be greater or less than the fair market value as determined by the directors of the Transferee Corporation.

20. Upon the issuance of the Class E preference shares, each Transferee Corporation will add to the stated capital account maintained by it for those shares the amount by which the total of

(a) the total of the agreed amounts under subsection 85(1) in respect of, any eligible property received by the Transferee Corporation on the Distribution which is the subject of an election under subsection 85(1), and

(b) the fair market value of any other property received by it on the Distribution and for which no election is made under subsection 85(1),

exceeds

(c) the total of the liabilities of the Distributing Corporation assumed by the Transferee Corporation as consideration for the Distribution.

21. The Distributing Corporation and each Transferee Corporation will jointly elect, in prescribed form and within the time allowed by subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of each property that is a capital property which is distributed to a Transferee Corporation on the Distribution. The amount designated in the prescribed election form as the agreed amount in respect of the interest in non-depreciable capital property transferred to the Transferee Corporation will be equal to the cost amount thereof to the Distributing Corporation. The amount designated in that form as the agreed amount in respect of the interest in depreciable property of a prescribed class of the Distributing Corporation will be an amount equal to 1/5 of the lesser of the fair market value of the interest and the undepreciated capital cost of that class of property to the Distributing Corporation immediately before the Distribution.

For greater certainty, the agreed amount in respect of any particular property will not be greater than its fair market value and will not be less than the amount of any liabilities assumed in respect of such property as described in paragraph 18(a) above.

22. The articles of the Distributing Corporation will be amended to create a new class of preference shares (the "Special Shares") having the following attributes:

(a) entitled to one vote per share;

(b) entitled to discretionary, non-cumulative dividends not exceeding $xxxxxxxxxx per annum per share;

(c) redeemable by the Distributing Corporation for the sum of $XXXXXXXXXX per share plus any dividends declared and unpaid on the share;

(d) entitled on liquidation and dissolution to the sum of $xxxxxxxxxx per share plus any dividends declared and unpaid on the share;

(e) automatically convertible, as a class and on a share for share basis, into Class A common shares upon the purchase for cancellation of all common shares issued and outstanding immediately before the purchase.

Each Principal of the Transteree Corporations will then subscribe for XXXXXXXXXX Special Shares for a subscription price of $XXXXXXXXXX per share.

23. Following the Distribution, each Transferee Corporation will redeem its Class E preference shares that were issued to the Distributing Corporation in consideration for the Distribution at their fair market value. Each Transferee Corporation will pay the redemption price for those shares by issuing to the Distributing Corporation a non-interest-bearing promissory note payable on demand with a principal amount and fair market value equal to the redemption price.

24. The fiscal period of each Transferee Corporation commencing on XXXXXXXXXX will be changed, subject to the consent of the Minister of National Revenue, to end after the redemption of its Class E preference shares described in paragraph 23 and before the purchase for cancellation of shares referred to in paragraph 25. The only reason for this change is to avoid the uncertainty arising from the circularity of the RDTOH calculation that would otherwise result from the fact that the Transferee Corporation is deemed to pay a dividend to the Distributing Corporation in the same taxation year as it receives a dividend from the Distributing Corporation. With the consent of the Minister of National Revenue, the end of the next fiscal period will be changed back to xxxxxxxxxx

25.

25. At least one day after the first fiscal period end referred to in paragraph 24 above, the Distributing Corporation will
then purchase for cancellation the XXXXXXXXXX Class A common shares of its capital stock that were issued and outstanding immediately before the Distribution at their fair market value. The purchase price will be paid by issuing to each Transferee Corporation a non-interest-bearing promissory note payable on demand with a principal amount and fair market value equal to the fair market value of the common shares of the Distributing Corporation owned by such Transferee Corporation.

26. The promissory notes payable by the Distributing Corporation to each Transferee Corporation which are referred to in paragraphs 15 and 25 and the promissory note payable by each Transferee Corporation to the Distributing Corporation as referred to in paragraph 23 will then be set off against each other and cancelled.

27. The Transferee Corporations will enter into an agreement (the "Common Ownership Agreement") providing for their respective rights and obligations, and the making of decisions, in respect of the real property interests received by them on the Distribution. They will continue to lease the real estate to Opco and to third parties. Legal title to the real property will continue to be held by the Distributing Corporation as bare trustee for and on behalf of the Transferee Corporations

Additional Information

28. No person or partnership has acquired any property that is

(a) a share of the Distributing Corporation or of a Transferee Corporation,

or

(b) any property 10% or more of the fair market value of which is derived from such a share

in contemplation of the proposed transactions described herein. No acquisition or disposition of any such property (other than as described under the heading "Proposed Transactions") is contemplated by any of the taxpayers involved in the proposed transactions

29. No property has become property of the Distributing Corporation in contemplation of the proposed Distribution of property by it to the Transferee Corporations.

30. Except as provided in paragraph 31, no person has any right under a contract, in equity or otherwise, either immediately or in the future and either contingently or absolutely,

(a) to, or to acquire any shares of the capital stock of the Distributing Corporation, Opco or any Transferee Corporation or to control the voting rights of such shares,

(b) to cause any such corporation to redeem, acquire or cancel any shares of its capital stock held by any other person,

(c) to, or to acquire or control, voting rights in respect of any shares referred to in subparagraph (a) hereof, or

(d) to cause a reduction in the voting rights in respect of any shares referred to in subparagraph (a) hereof.

31. Opco and the Distributing Corporation (referred to in this paragraph as the "Corporations") and their shareholders have entered into a shareholders' agreement that provides for certain rights regarding the purchase for cancellation of shares in the capital stock of the Corporations. Under that agreement,

(a) where a Transferee Corporation receives a bona fide offer from a third party to purchase its shares of the Corporations, which offer it desires to accept, it must give notice to the other shareholders and the Corporations, and the Corporations have the option to purchase the Transferee Corporation's shares of the Corporations on the same terms and conditions as are contained in the third party offer;

(b) upon receipt of an offer from a Transferee Corporation (the "Offeror") to sell its shares of the Corporations to the Corporations, the Corporations, at the option of the other Transferee Corporations, must either

(i) purchase the offered shares for cancellation, or

(ii) purchase for cancellation, pro rata from the other Transferee Corporations, the same number of shares of the Corporations as are offered for sale by the Offeror;

(c) upon receipt by a particular Transferee Corporation (the "Offeree") of an offer from the other Transferee Corporations to have each of the Corporations purchase for cancellation shares of its capital stock held by the Offeree, either

(i) the Offeree must sell its shares to the Corporations for cancellation, or

(ii) at the option of the Offeree, the Corporations must purchase for cancellation, pro rata from the other Transferee Corporations, the same number of shares of the Corporations as are owned by the Offeree

32. Neither the Distributing Corporation nor any of the Transferee Corporations is, or will be at any time before the completion of the proposed transactions, a restricted financial institution or a specified financial institution.

33. There is not, and will not be at any time before the completion of the proposed transactions described herein, any guarantee agreement referred to in subsection 112(2.2) given by a specified financial institution, or by a specified person in relation to a specified financial institution within the meaning of that subsection, in respect of any share in the capital stock of the Distributing Corporation or any Transferee Corporation.

34. None of the shares of the Distributing Corporation owned by the Transferee Corporations was acquired under circumstances referred to in subsection 112(2.5).

Purpose of the Proposed Transactions

The main purpose of the proposed transaction is to enable each Transferee Corporation to hold its share of the Distributing Corporation's property directly. This will provide the five Principals with greater flexibility in estate planning and should result in each Transferee Corporation's share of the rental income being treated as income from property rather than as active business income under subsection 129(6).

Rulings

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our rulings are as follows.

A. The provisions of subsection 85(1) will apply to the transfers of real property (including land and buildings) on the Distribution, with the result that the agreed amount in respect of each property so transferred will be deemed by paragraph 85(1)(a) to be the proceeds of disposition of the property to the Distributing Corporation and the cost of the property to the Transferee Corporation. For greater certainty, paragraph 85(1)(e.2) will not apply to such transfers.

B. On the redemption by each Transferee Corporation of its Class E preference shares of the Distributing Corporation as described in paragraph 23, the Transferee Corporation will be deemed by subsection 84(3) to have paid, and the Distributing Corporation will be deemed by that subsection to have received, a dividend equal to the amount by which the redemption price paid exceeds the paid-up capital of those shares immediately before the redemption.

C. On the purchase for cancellation by the Distributing Corporation of its common shares held by the Transferee Corporations as described in paragraph 25, the Distributing Corporation will be deemed by subsection 84(3) to have paid, and each Transferee Corporation will be deemed by that subsection to have received, a dividend equal to the amount by which the total purchase price paid for the shares exceeds the paid-up capital in respect of those shares.

D. The taxable dividends referred to in Rulings B and C will be deductible under subsection 112(1) in computing the income of the recipient thereof and, for greater certainty, the deduction thereof will not be denied by subsection 112(2.1), (2.2) or (2.4).

E. No taxes under Part IV.1 will be payable by the recipient of any dividends referred to in Rulings B and C as each such dividend will be an excepted dividend by virtue of paragraph (b) of the definition "excepted dividend" in section 187.1.

F. No taxes under Part VI.1 will be payable by the payer of any dividends referred to in Rulings B and C as each such dividend will be an excluded dividend by virtue of paragraph (a) of the definition "excluded dividend" in subsection 191(1).

G. By virtue of subsections 186(2) and 186(4), each Transferee Corporation will be connected with the Distributing Corporation. Provided that the particular Transferee Corporation is not entitled to a dividend refund (within the meaning of subsection 129(1)) in respect of its taxation year in which it is deemed to pay the dividend referred to in Ruling B above, the Distributing Corporation will not be subject to Part IV tax under subsection 186(1) in respect of such dividend.

H. By virtue of subsections 186(2) and 186(4), the Distributing Corporation will be connected with each of the Transferee Corporations. Consequently, each of the Transferee Corporations shall, pursuant to paragraph 186(1)(b), be subject to Part IV tax in an amount equal to that proportion of the dividend refund to which the Distributing Corporation will become entitled as a result of the deemed payment of the dividend referred to in ruling C above, that the amount of such dividend received by the particular Transferee Corporation is of the aggregate of all taxable dividends paid by the Distributing Corporation in its taxation year in which such dividend is paid.

I. Provided that as part of the series of transactions or events that includes the proposed transactions described herein, there is not:

(a) a disposition of property in the circumstances described in subparagraph 55(3.1)(b)(i)

(b) an acquisition of control in the circumstances described in subparagraph 55(3.1)(b)(ii);

(c) an acquisition of property in the circumstances described in paragraph 55(3.1)(c); or

(d) an acquisition of property in the circumstances described in paragraph 55(3.1)(d),

which has not been described herein, then by virtue of paragraph 55(3)(b), subsection 55(2) will not apply to the taxable dividends referred to in Rulings B and C above and, for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3) (b)

J. Subsection 80(1) will not apply to the extinguishment of the debt obligations between the Distributing Corporation and the Transferee Corporations on the set-off and cancellation of the promissory notes as contemplated by paragraph 26 above.

K. Subsections 15(1), 56(2) and 69(4) will not be applied as a result of the proposed transactions in and by themselves.

L. Provided that a Transferee Corporation is not associated with Opco, subsection 129(6) will not apply to deem the rental income to be earned by such Transferee Corporation from the leasing Qf property to Opco to be income from an active business carried on by it in Canada.

M. As a result of the proposed transactions described herein, in and by themselves, subsection 245(2) will not be applied to redetermine the tax consequences confirmed in the rulings given.

The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996, and are binding on Revenue Canada provided that the proposed transactions are completed by XXXXXXXXXX.

These rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act which, if enacted into law, could have an effect on the rulings provided herein.

Comments

1. You have informed us, in paragraph 19 above, that the redemption price of the Class E preference shares of the Transferee Corporations will be adjustable in the event that Revenue Canada determines the fair market value of the property received on the Distribution to be different than the fair market value as determined by the directors of the Transferee Corporation.

Nothing in this letter should be interpreted as confirming that,

(a) for purposes of the Act, any adjustment made pursuant to any such price adjustment clause in respect of a transaction subsequent to the time of such transaction will be effective, retroactively, to the time of such transaction, or

(b) for the purposes of the Act, any amount paid pursuant to any such price adjustment clause, in respect of a transaction subsequent to the time of such transaction will be an additional payment of the redemption or purchase price of any shares redeemed or repurchased.

The operation of a price adjustment clause is not a proposed transaction and, consequently, advance rulings are not given by the Department in respect thereof. The Department's general position with respect to price adjustment clauses in agreements is set out in Interpretation Bulletin IT-169 dated August 6, 1974.

2. The rulings given in this letter are not intended as acceptance by Revenue Canada of the requests to change the fiscal periods of the Transferee Corporations as described in paragraph 24 above. Pursuant to subsection 900(2) of the Income Tax Regulations the responsibility for approving such requests has been delegated to the Director of the taxation services office where the corporations file their federal income tax returns.

3. Nothing in this ruling should be construed as implying that Revenue Canada has agreed to or reviewed:

(a) the determination of the fair market value or adjusted cost base of any property referred to herein, or

(b) any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above. For greater certainty, we are not commenting on the potential application of subsection 256(1.4) with respect to the Buy-Sell Provisions described in paragraph 31. The Department's position with respect to such "rights of first refusal" and "shot-gun arrangements" is set out in paragraph 37 of Interpretation Bulletin IT-64R3 which states that subsection 256(1.4) will not apply to shareholder agreements which contain what are commonly referred to as "rights of first refusal" or "shotgun arrangements".

Yours truly,

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