14 January 1999 External T.I. 9828555 - CHANGE TO DIVIDEND RATE

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 a shareholder receives a benefit when shares with a 10% dividend rate are exchanged for shares with a 15% dividend rate.

Position: The shareholder would have received a benefit.

Reasons: It is a question of fact whether a share with a 10% dividend rate would have a fmv that is less than a share with a 15% dividend rate with all other rights being the same.

XXXXXXXXXX 5-982855
J. Teixeira
Attention: XXXXXXXXXX

January 14, 1999

Dear Sirs:

Re: Request for Technical Interpretation

This is in reply to your letter of October 29, 1998, wherein you requested our views on whether the increase in the dividend rate of a class of shares from 10% to 15% would constitute a benefit under subsection 15(1) of the Income Tax Act (the “Act”) where the dividend right, although preferential to any other class of shares of the corporation, is non-cumulative and payable only at the discretion of the Board.

It is your view that such an increase would not constitute a benefit under subsection 15(1) and where the change occurs on an exchange of shares in the course of reorganization of capital, subsection 86(2) would not apply. Based on the principles in the decision in Neuman v. The Queen, you believe that subsections 56(2) and (4) would also not apply. In addition, it is your view that in the case where the dividend rights of other shareholders are subordinated, pursuant to the share capital reorganization, section 74.4 could apply only where the person benefiting from the increased dividend rate is a “designated person” as defined in subsection 74.4(1).

Our Comments

We agree with your view that subsection 86(2) will not apply in an exchange of shares of a shareholder in the course of the reorganization of capital where shares with a 10% dividend rate are exchanged for shares with a 15% dividend rate.

However, it is our opinion that where the dividend rate of a class of shares is increased, the shareholder with the increased dividend rate would have received a benefit. Subsection 15(1) would not apply where the increase in the dividend rate of a class of shares has been effected in a manner that would meet the exception in paragraph 15(1)(a).

In addition, in accordance with the decision in The Queen v Kieboom, 92 DTC 6382 (F.C.A.), the shareholders who concurred with the increase in the dividend rate could be considered to have disposed of part of their economic interest in the corporation, and could therefore be deemed to have received proceeds equal to the fair market of such economic interest pursuant to p aragraph 69(1)(b), where the shareholders were not dealing at arm’s length.

It is a question of fact whether a share with a 10% dividend rate on the redemption price and payable only at the discretion of the board would have a fair market value that is not less than the fair market value of a share of the same corporation and with the same rights but with a 15% dividend rate.

The comments expressed are not advance income tax rulings and are not considered binding on the Department, in respect of any taxpayer, in accordance with paragraph 22 of Information Circular IC-70-6R3 dated December 30, 1996.

Yours truly,

for Director
Reorganization and International Division
Income Tax Rulings and
Interpretation Directorate
Policy and Legislation Branch
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