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 the shares of a particular corporation can be considered prescribed shares for purposes of subsection 110.6(8) of the Act, by virtue of subsections 6205(1) and (2) of the Regulations
Position TAKEN:
No.
Reasons FOR POSITION TAKEN:
The Class A and B common shares are convertible into Class C preferred shares. The Class C shares do not qualify as prescribed shares, as they do not meet the requirements of subparagraph 6205(2)(a)(i) of the Regulations and, as a result, the Class A and B common shares also do not qualify as prescribed shares, as they do not meet the requirements of clause 6205(1)(a)(i)(C) of the Regulations
XXXXXXXXXX 5-990296
M. Azzi
Attention: XXXXXXXXXX
May 4, 1999
Dear Sirs:
Re: Section 6205 of the Income Tax Regulations (the “Regulations)
This is in reply to your letter of February 2, 1999, wherein you requested our views on whether the shares of a particular corporation can be considered prescribed shares for purposes of subsection 110.6(8) of the Income Tax Act (the “Act”), by virtue of subsections 6205(1) and (2) of the Regulations.
We understand that the authorized and issued share capital of the corporation (the “Corporation”) consists of Class A and Class B common shares, and Class C preferred shares. The Class A shares are voting, the Class B shares are non-voting, and both the Class A and B shares are convertible to Class C shares. You indicate that all the shareholders of the Corporation are party to a shareholders agreement that stipulates that no shares shall be converted from one class to another unless approved by a Special Resolution of the Class A shareholders. You further indicate that, occasionally in the past, all the Class A and B shareholders have converted their shares into Class C shares, to accomplish a “freeze” and allow non-shareholder employees to acquire either Class A or B shares. Your concerns relate particularly to the application of clause 6205(1)(a)(i)(C) and subparagraph 6205(2)(a)(i) of the Regulations, to the shares of the Corporation.
Written confirmation of the tax implications inherent in particular transactions is given by this directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R3, dated December 30, 1996. Where the particular transactions are completed, the enquiry should be addressed to the relevant tax services office. However, we are prepared to offer the following general comments.
Subsection 110.6(8) of the Act is an anti-avoidance rule enacted to prevent the conversion of dividend income into exempt capital gains of individuals. Subsection 110.6(8) of the Act applies to deny a capital gains deduction if it can reasonably be concluded, having regard to all the circumstances, that a significant part of the capital gain is attributable to the fact that dividends were not paid on a share (other than a prescribed share) of a corporation or that dividends paid on such a share in a year or in a preceding taxation year were less than 90% of the average annual rate of return (as defined in subsection 110.6(9) of the Act) thereon for that year.
A share that is prescribed under section 6205 of the Regulations is exempt from the application of subsection 110.6(8) of the Act. One of the requirements for being prescribed under subsection 6205(1) of the Regulations, as provided in clause C of that provision, is that the share cannot be converted into any other security, other than into another security of the corporation that is, or would be at the date of conversion, a prescribed share. Consequently, since the Class A and B common shares of the Corporation are convertible into Class C preferred shares, the Class A and B shares would not satisfy the requirements of clause 6205(1)(a)(i)(C) of the Regulations and, as such these shares would not qualify as prescribed shares, unless the Class C preferred shares also qualify as prescribed shares. Based on the facts you have provided, the Class C shares are preferred shares and do not fall under the ambit of subsection 6205(1) of the Regulations. Accordingly, the Class C shares would have to fall under subsection 6205(2), in order to qualify as prescribed shares.
In order to qualify under subsection 6205(2) of the Regulations, a share must, inter alia, be issued by a corporation as part of an arrangement the main purpose of which was to permit any increase in the value of the property of the corporation to accrue to “other shares” that would, at the time of their issue, be prescribed shares if section 6205 of the Regulations were read without reference to subsection 6205(2). That is, the Class A and B common shares (i.e., the “other shares”) of the Corporation would have to qualify as prescribed shares without relying on subsection 6205(2) of the Regulations. Since, as explained above, the Class A and B shares cannot qualify without relying on the Class C shares qualifying under subsection 6205(2) of the Regulations, the Class A and B shares cannot qualify as the “other shares” described in subparagraph 6205(2)(a)(i) of the Regulations. Consequently, the Class C shares do not qualify as prescribed shares, as they do not meet the requirements of subparagraph 6205(2)(a)(i) of the Regulations and, as a result, the Class A and B common shares also do not qualify as prescribed shares, as they do not meet the requirements of clause 6205(1)(a)(i)(C) of the Regulations. Please note, that these comments should not be taken as an acceptance that any of the other requirements of section 6205 of the Regulations may or may not have been met, with respect to the shares of the Corporation, as we were not provided with sufficient information in order to make such a determination.
It should also be noted, however, that the fact that the shares of a corporation do not qualify as prescribed shares does not, in and by itself, cause subsection 110.6(8) of the Act to apply to deny the capital gains deduction in respect of a gain realized on those shares. As indicated above, all the circumstances of a particular situation must be considered in determining whether a significant part of a capital gain is attributable to insufficient dividends, and we have not been provided with sufficient information to make such a determination. As explained above, if such a determination involves proposed transactions, it is generally done in the context of an advance income tax ruling, and if the transactions are completed, through a review by officials of the relevant tax services office.
We trust that these comments will be of assistance.
Yours truly,
Jim Wilson
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
- 3 -
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 1999
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 1999
Email this Content