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.
Principal Issues: What is meant by "owns more than 10% of the issued share capital (having full voting rights under all circumstances)" as outlined in subparagraph 186(4)(b)(i) of the Act in the context where common shares and multiple voting shares are issued and outstanding?
Position: CRA's position with respect to that requirement is that subparagraph 186(4)(b)(i) refers to a calculation of the number of shares issued and outstanding having full voting rights under all circumstances. In the particular situation, the number of common shares held by the particular corporation would be XXXXXXXXXX and the total number of shares having full voting rights would be XXXXXXXXXX . Thus, in the given situation, the particular corporation would hold XXXXXXXXXX % of the total number of shares issued by Opco having full voting rights under all circumstances.
Reasons: Wording of subparagraph 186(4)(b)(i) of the Act and previous position.
April 23, 2010
Mr. Robert Truchon HEADQUARTERS
Technical Advisor Income Tax Rulings
Sudbury Tax Services Office Directorate
180 Shireff Ave., Suite 223 Sylvie Labarre
North Bay ON P1B 9B4
2010-035955
Re: Connected corporations
We are writing in response to your electronic message of March 4, 2010 in which you requested our views on subparagraph 186(4)(b)(i) of the Income Tax Act (hereinafter the "Act") in the following particular situation.
Facts
A corporation ("Opco"), which would be incorporated in Ontario, would be authorized to issue Common shares and Class A shares.
The attributes of the shares of the capital stock of Opco would be as follows.
The Class A shares shall be designated as non-cumulative, redeemable, retractable, voting special shares without par value.
The holders of the Class A shares and the Common shares shall be entitled to receive notice of and to attend all meetings of shareholders and the holders of the Class A shares shall be entitled to XXXXXXXXXX votes per Class A share at such meetings and the holders of Common shares shall be entitled to one vote per common share.
In the event of the liquidation, dissolution or winding-up of the corporation or other distribution of assets or property of the corporation among the shareholders for the purpose of winding-up its affairs, the holders of the Class A shares shall be entitled in priority to the holders of the common shares to receive from the assets and property of the corporation a sum equivalent to the Redemption Amount of each of the Class A shares held by them respectively together with all declared and unpaid dividends thereon before any amount shall be paid or any property or assets of the corporation distributed to the holders of any common shares. After payment to the holders of the Class A shares of the amount so payable to them as above provided they shall not be entitled to share in any further distribution of the assets or property of the corporation.
Dividends shall not be declared or paid on the Common shares outstanding from time to time if the effect would be to prevent the corporation from redeeming any of its Class A shares at the Redemption Amount.
The corporation shall not purchase the Class A shares for less than the lesser of their redemption amount or the Corporation's net realizable value.
The Common shares shall rank junior to the Class A shares and shall be subject in all respects to the preferences, rights, conditions, restrictions, limitations and prohibitions attaching thereto.
The right to transfer shares of the Corporation is restricted in that no share shall be transferred except with the consent of the Board of Directors of the corporation, to be expressed either by a resolution passed at a meeting of the Board of Directors or by an instrument or instruments in writing signed by a majority of the Directors.
We assume that the Common shares would be participating.
The shareholders of Opco would be as follows:
Father XXXXXXXXXX
Son A Holdco XXXXXXXXXX
Son B Holdco XXXXXXXXXX
Son C Holdco XXXXXXXXXX
Son D Holdco XXXXXXXXXX
Thus, Son A Holdco (the "particular corporation" for the purposes of section 186 of the Act) would hold XXXXXXXXXX common shares of Opco (the "payer corporation" for the purposes of section 186 of the Act) with a stated capital of $XXXXXXXXXX . These shares would represent XXXXXXXXXX votes (1 vote per common share) being XXXXXXXXXX % of the total votes, XXXXXXXXXX % of the stated capital ($XXXXXXXXXX /$XXXXXXXXXX ) and more than 10% of the fair market value of all the issued shares of the capital stock of the payer corporation.
As indicated above, Father would be the holder of XXXXXXXXXX Class A shares with a stated capital of $XXXXXXXXXX ($XXXXXXXXXX per share). Those shares would represent XXXXXXXXXX votes (XXXXXXXXXX votes per share) being XXXXXXXXXX % of the total votes (XXXXXXXXXX /XXXXXXXXXX ) and XXXXXXXXXX % of the stated capital ($XXXXXXXXXX /$XXXXXXXXXX ) of the payer corporation.
Question
At issue is whether Son A Holdco would meet the requirement that the particular corporation must own "more than 10% of the issued share capital (having full voting rights under all circumstances)" of the payer corporation as outlined in subparagraph 186(4)(b)(i) of the Act.
You are of the view that Son A Holdco would meet the requirement set out in subparagraph 186(4)(b)(ii) of the Act.
CRA's position with respect to the requirement provided in subparagraph 186(4)(b)(i) of the Act is that this legislative provision refers to a calculation of the number of shares issued and outstanding having full voting rights under all circumstances. Thus, for the purposes of applying the "more than 10% test" in subparagraph 186(4)(b)(i) of the Act, the percentage is determined by dividing the number of shares of the capital stock of the payer corporation owned by the particular corporation that have full voting rights under all circumstances by the number of all the issued and outstanding shares of the capital stock of the payer corporation that have full voting rights under all circumstances. That position was stated, inter alia, at the Round Table on Federal Taxation that was held by the Association de planification fiscale et financière du Québec ("APFF") in its 1997 Conference (Question 5.1). The CRA indicated that such position was still valid in Question 6 of the Round Table on Federal Taxation of the 2009 APFF Conference.
You only submitted excerpts of the articles of Opco. When considering those excerpts and subject to the examination of all of the constating documents of the corporation, the Common shares and the Class A shares of the capital stock of Opco would appear to have "full voting rights under all circumstances" in the context of applying subparagraph 186(4)(b)(i) of the Act. The fact that Father would hold shares representing XXXXXXXXXX votes and would control Opco would not, in and by itself, result in the Common shares being considered as not having full voting rights in the situation described above.
In your particular situation, Son A Holdco would hold XXXXXXXXXX % of the total number of shares issued by Opco having full voting rights under all circumstances (XXXXXXXXXX shares/XXXXXXXXXX shares). Therefore, Son A Holdco would meet the requirement provided in subparagraph 186(4)(b)(i) of the Act. Consequently, Opco would be connected with Son A Holdco, assuming that the requirement of subparagraph 186(4)(b)(ii) of the Act would also be met.
Finally, please note that we would need more information to determine whether Opco would also be connected with Son A Holdco by virtue of paragraph 186(4)(a) and subsection 186(2).
We trust that our comments will be of assistance.
Yours truly,
Stéphane Prud'Homme, LL.B, M. Fisc.
Manager
Mergers and Acquisitions Section
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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