27 April 1990 Income Tax Severed Letter AC59250 - Shareholder's Benefit

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.

19(1) 5-9250

S. Shinerock
(613) 957-2108

March 27, 1990

Dear Sirs:

Re: Subsection 15(1) of the Income Tax Act (the "Act")

We refer to your letter of December 10, 1989, in which you requested our opinion on the application of the provisions of paragraph 15(1)(c) of the Act to the following situation.

Canco, a taxable Canadian corporation, within the meaning of paragraph 89(1)(i) of the Act, confers on all owners of its common shares a "right" to buy units consisting of shares of Canco and "warrants", which may be exercised to buy additional shares of Canco. It is our view that, by virtue of paragraph 15(1)(c) of the Act, no benefit would be included in computing the income of a shareholder of Canco pursuant to subsection 15(1) of the Act, since both the "right" and the "warrant" confer on all owners of common shares of Canco a right to buy additional shares thereof.

You also request our opinion on the timing of the inclusion in the income of a shareholder of a corporation where subsection 15(1) of the Act would apply to include the amount or value of a benefit in computing the income of the shareholder, presumably, in those cases where paragraph 15(1)(c) of the Act would not apply to an issue of rights or warrants.

Opinions

It appears your request may relate to a specific proposed transaction. Confirmation of the tax consequences of a specific proposed transaction will only be provided in response to a request for an advance income tax ruling. The procedures for requesting an advance ruling are set out in Information Circular 70-6R. We are, however, able to provide the following general comments in response to your enquiry.

In providing these general comments, we make the following assumptions:

• (i) that Canco is a public corporation, within the meaning of paragraph 89(1)(g) of the Act, and
• (ii) that the warrant part of the unit referred to above is severable and tradeable apart from the share part of the unit.

We would agree that the "right" and the "warrant" would both be considered to be "... a right to buy additional shares ..." as referred to in paragraph 15(1)(c) of the Act. Consequently, it is our opinion that subsection 15(1) of the Act would not apply to the issue of the units by Canco. However, it is also our view that since the warrant would, under the assumption made above, be severable and tradeable apart from the share with which it would be issued, an allocation of the issue price of a unit (including any expenses related to such issue) must be made between the share part and the warrant part of the unit based on the relative fair market values thereof.

With respect to your second query, it is our opinion that the amount or value of a benefit includable in computing the income of a shareholder of a corporation would occur at the time when the shareholder would be entitled to the property which would give rise to the benefit. For example, if the provisions of subsection 15(1)of the Act would be applicable to a shareholder who subscribed for a unit issued by a corporation, where the unit was comprised of a share and a warrant that was severable and tradeable apart from the share, the amount or value of the warrant that, it is here assumed, would constitute the benefit, would be determined at the time entitlement to the unit would arise.

As stated in paragraph 24 of Information Circular 70-6R dated December 18, 1978, the opinions expressed in this letter are not rulings and are consequently not binding on the Department.

Yours truly,

for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch

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