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.
QUESTION
Subsection 191(4) requires that, for purposes of the taxes levied on certain preferred shares under Parts IV.1 and VI.1 of the Act, an amount be specified in respect of preferred shares issued in the course of a reorganization. The wording of subsection 191(4) suggests that a specific dollar amount, as opposed to a formula, must be specified in respect of the redemption amount. In Revenue Canada's view can a formula be considered a "specified amount" for purposes of subsection 191(4) of the Act?
DEPARTMENT'S POSITION
The purpose of subsection 191(4) is to have the issuer corporation indicate at the time a share is issued in the course of a reorganization a "specified amount" which is the fair market value for which the share was issued. The share can be redeemed to the extent of this amount without having Part VI.1 and Part IV.1 apply provided the specified amount does not exceed the fair market value of the consideration received. Having the issuer corporation specify the amount was intended to cut down on debates as to the fair market value of the consideration for which the share was issued at some future date when the share is redeemed.
Consequently, a formula which permitted this amount to be adjusted would defeat the purpose of having the specified amount restriction.
It is therefore, the Department's view that the terms or conditions of the share or the agreement in respect of the share must specify an actual dollar amount for purposes of subsection 191(4). By specifying an amount, the corporation is not precluded from redeeming the share for a greater amount, but the amount of the excess will not qualify as an exempt dividend by virtue of subsection 191(5).
Prepared by: T. Harris
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