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.
Dear Sirs:
Re: Advance Income Tax Ruling XXX
We are writing in response to your letter of July 15, 1991 wherein you requested our views XXX. You have asked the following questions:
- 1. Would the Department accept a fixed cumulative dividend at a certain percentage of the redemption price in place of the retraction feature? If so, what is the minimum acceptable percentage?
- 2. Would the Department accept a shareholders' agreement to limit the ability of the shareholders to retract the preferred shares to a certain percentage per year? If so, what is the minimum percentage which may be retracted?
- 3. Would the Department accept a shareholders' agreement to have the total redemption amount payable over a period of time? If so, would interest have to be charged on the outstanding balance?
Comments
As stated in the reply to question 13 at the 1980 Revenue Canada Round Table, the Department is concerned with the fair market value of the shares received as consideration for the shares transferred to the corporation pursuant to subsection 85(1) of the Income Tax Act (Canada) (the “Act”). As described in subparagraph 14(f) of Information Circular 70-6R2 dated September 28, 1990 issued by Revenue Canada, Taxation (“IC 70-6R2”), we are unable to provide any comments on the determination of fair market value. However, it is our view that the fair market value of the preferred shares may be maintained if the shares carried a cumulative dividend entitlement at a rate which reflects fair market value.
Since the shareholders' agreement described above would affect the retractability of the shares and thus the fair market value of those shares, it is our position that paragraph 85(1)(e.2) of the Act would be applicable.
The comments expressed are not advance income tax rulings and are not considered binding on the Department, in respect of any taxpayer, in accordance with paragraph 21 of IC 70-6R2 [Information Circular 70- 6R2].
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© Her Majesty the Queen in Right of Canada, 1991
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© Sa Majesté la Reine du Chef du Canada, 1991
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