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: Does an automatic acquisition or redemption of shares upon the occurrence of a specified triggering event imply that no person has a "right to cause a corporation to redeem or acquire any of its shares", and that therefore paragraph 256(1.4)(b) would not apply in determining whether or not any corporations are associated.
Position: Paragraph 256(1.4)(b) will apply where a person or partnership is in a position to cause the occurrence of a specified triggering event referred to in a unanimous shareholders agreement.
Reasons: The fact that a redemption, acquisition or cancellation of shares is automatic upon the occurrence of a specified triggering event is not, in itself, determinative of whether or not a person has a right to cause a corporation to redeem, acquire or cancel any of its shares owned by other shareholders. For example, where a person is in a position to cause the occurrence of a specified triggering event, the provisions of paragraph 256(1.4)(b) would be met.
980570
XXXXXXXXXX T. Lanzer
(613) 957-2129
Attention: XXXXXXXXXX
June 18, 1998
Dear Sirs:
Re: Subsection 256(1.4) of the Income Tax Act
We are writing in response to your letter of March 5, 1998 wherein you requested our opinion with respect to various clauses which may be contained in a unanimous shareholders’ agreement, and whether or not such clauses would give rise to the type of rights referred to in subsection 256(1.4) of the Income Tax Act (the "Act").
The issue to be determined is whether an automatic acquisition or redemption of shares upon the occurrence of a specified triggering event implies that no person has a right to cause a corporation to redeem or acquire any of its shares, and that therefore the provisions of subsection 256(1.4) of the Act would not apply in determining whether or not any corporations are associated. It is your view that subsection 256(1.4) of the Act does not cover those situations in which there is an automatic acquisition by a corporation of its own shares once a contingency has been realized, for example, where an employee shareholder has left the employ of that corporation.
In particular, you ask whether the following conditions, which pursuant to a unanimous shareholder agreement would give rise to an automatic acquisition by a corporation of its owns shares, would cause the provisions of paragraph 256(1.4)(b) to apply:
1. Where an individual ceases to be employed by a Corporation, shares in the Corporation whether held by him personally or through a wholly-owned Holding Company would automatically be acquired by the Corporation;
2. Where there is a change in control in a Holding Company, shares in the Corporation held by the Holding Company would automatically be acquired by the Corporation;
3. Where a Holding Company is placed in receivership or a receiver is appointed, shares in the Corporation held by the Holding Company would automatically be acquired by the Corporation;
4. Where a shareholder fails to observe, perform or carry out any of his obligations under the shareholder agreement and such failure continued for 30 days after the Corporation or the non-defaulting shareholders have in writing demanded that such failure be cured, shares in the Corporation held by the shareholder would automatically be acquired by the Corporation;
5. Where a shareholder purports to sell, transfer or otherwise encumber or assign his interest in the Corporation or the Holding Company in contravention of the terms of the shareholder agreement, shares in the Corporation held by the shareholder or the Holding Company would automatically be acquired by the Corporation;
6. Where a shareholder’s interest or any part thereof becomes seized, attached or subject to any distress or execution, shares in the Corporation held by the shareholder would automatically be acquired by the Corporation.
Subsection 256(1.4) extends the concept of share ownership for the purposes of the association rules. This subsection is extremely broad and applies to any right granted under a contract, in equity or otherwise, either immediately or in the future, and either absolutely or contingently, to acquire shares or control the voting rights of shares of the capital stock of a corporation, or to cause a corporation to redeem, acquire or cancel any shares of its capital stock owned by other shareholders. An exemption is provided where the exercise of the right is contingent on the death, bankruptcy or permanent disability of an individual.
Paragraph 256(1.4)(b) deems a person who has a right to cause a corporation to redeem, acquire or cancel any shares of its capital stock owned by other shareholders of the corporation to be in the same position in relation to the control of the corporation and ownership of shares of the corporation as if the shares had been redeemed, acquired or cancelled.
The fact that a redemption, acquisition or cancellation of shares is automatic upon the occurrence of a specified triggering event is not, in itself, determinative of whether or not a person has a right to cause a corporation to redeem, acquire or cancel any of its shares owned by other shareholders. For example, in the circumstances where a person is in a position to cause the occurrence of a specified triggering event, we believe that the provisions of paragraph 256(1.4)(b) would be met.
As stated in paragraph 37 of Interpretation Bulletin IT-64R3 the wording in subsection 256(1.4) is broad enough to include almost any "buy-sell" agreement; however, it will not be applied unless both (or all) parties clearly have either a right or an obligation to buy or sell as the case may be. In the situation where a unanimous shareholders agreement provides for an automatic acquisition or redemption of shares of a corporation by the corporation upon the occurrence of a specified triggering event, it is our view that the corporation clearly has an obligation to acquire and the shareholder clearly has an obligation to sell the shares upon the occurrence of the specified triggering event. Consequently, paragraph 256(1.4)(b) will apply where a person or partnership is in a position to cause the occurrence of a specified triggering event referred to in such a unanimous shareholders agreement.
In accordance with paragraph 22 of Information Circular 70-6R3, the opinions expressed in this letter are not income tax rulings and are therefore not binding on the Department.
Yours truly,
for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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