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:
1.Whether shares will qualify as "prescribed shares", within the meaning of paragraph 6205(1)(a) of the Regulations, where the dividend entitlement of the shares is not in fact limited at the time the shares are issued but the terms or conditions of the shares provide for a limit in the amount of dividends that can be declared and paid?
2.Whether shares issued to a partnership will qualify as "prescribed shares" within the meaning of paragraph 6205(2)(a) of the Regulations?
Position TAKEN:
1.Shares will not qualify.
2.Shares will not qualify.
Reasons FOR POSITION TAKEN:
1.In determining whether a share is a "prescribed share" within the meaning of subsection 6205(1) of the Regulations, the terms or conditions of the share or any agreement in respect of the share, at the time the share is issued, must be considered.
2.The word "person" in paragraph 6205(2)(a) of the Regulations does not include a partnership because:
1)although the Department has interpreted the word "person" to include a partnership, it has always been in the context of a provision relating to the determination of income. Subsection 6205(2) of the Regulations is not such a provision.
2)the words "person" and "partnership" are both found in subsection 6205(1). Therefore, it would appear that the word "person" in subsection 6205(2) was not intended to include a partnership.
3)subsection 6205(2) refers to a person or a spouse or parent of that person. Since a partnership cannot have a spouse or parent, this is another indication that the word "person" does not include a partnership.
5-951498
XXXXXXXXXX C. Chouinard
August 17, 1995
Dear Madam:
Re: Prescribed Shares - Regulation 6205
We are writing in response to your letter of May 26, 1995, wherein you requested our comments on the application of Regulation 6205 of the Income Tax Regulations (the "Regulations") in the following two situations:
1) The share capital of a corporation is structured such that several classes of common shares are authorized, each class having the same attributes as the others, except that dividends can be declared and paid separately on each class. A surplus account must be maintained for each class of shares and profits and losses of the corporation must be allocated/charged proportionately to each surplus account based on the number of common shares in each class. Dividends are declared and paid based on the surplus account of the relevant class of shares. Only one such class of shares has been issued by the corporation. In your view, these shares would be "prescribed shares" since Regulation 6205 provides that the determination of prescribed share status is made "at the time the share is issued" and, in this case, the amount of the dividends was not limited at that time. You ask that we confirm your view.
2) You also inquire whether paragraph 6205(2)(a) of the Regulations would apply in a situation involving a transfer by a partnership to a corporation of all of its assets in exchange for shares of the corporation. In your view, since the shares are issued to a partnership, paragraph 6205(2)(a) of the Regulations would not apply.
As regards the first situation described above, in our view, in determining whether a share is a "prescribed share" within the meaning of subsection 6205(1) of the Regulations, the terms or conditions of the share or any agreement in respect of the share, at the time the share is issued, must be considered. Therefore, if, at the time the share is issued, the terms and conditions of the share limit the amount of dividends that the corporation may declare or pay, contrary to clause 6205(1)(a)(i)(A) of the Regulations, the share will not qualify as a "prescribed share". In the first situation described above, in our view, the terms and conditions of the share, at the time it is issued, limit the entitlement to dividends, since the amount of a dividend cannot exceed the amount in the surplus account for the relevant class of shares. Although the dividends are not in fact limited, given that only one class of shares has been issued by the corporation, since the terms or conditions in respect of the shares provide that the dividend is limited to the amount in the surplus account, in our view, the shares would not qualify as "prescribed shares".
With respect to your second question, we agree that paragraph 6205(2)(a) of the Regulations would not apply where shares are issued to a partnership, since the word "person" in paragraph 6205(2)(a) does not include a partnership. According to paragraph 6205(2)(a) of the Regulations, in order to qualify as prescribed shares, the shares must be owned by a person and must have been issued to that person, or to a spouse or a parent of that person as part of an arrangement whose main purpose was to permit any increase in the value of the property of the corporation to accrue to other shares owned by persons who do not deal at arm's length with the original owner. As the shares were issued to a partnership, this raises the question of whether a partnership is a "person" for purposes of paragraph 6205(2)(a) of the Regulations. The Department's position is that the word "person" in the Act includes a partnership only in the context of a provision relating to the determination of income. Subsection 6205(2) of the Regulations is not such a provision. Furthermore, in light of the fact that the words "person" and "partnership" are both found in subsection 6205(1) of the Regulations, it would appear that the word "person" in subsection 6205(2) of the Regulations was not intended to include a partnership. It should also be noted that subsection 6205(2) of the Regulations refers to a person or a spouse or parent of that person. Since a partnership cannot have a spouse or parent, this is another indication that the word "person" does not include a partnership.
We trust that these comments will be of assistance.
Yours truly,
R. Albert
for Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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