CRA effectively rules that Part VI.1 tax could apply to an agreement to repurchase common shares for their current FMV, if their FMV declines by the closing time

A CCPC (B Ltd.) has two outstanding classes of common shares: the Class B common shares are held by three taxable Canadian corporations or partnerships (C, D, and E): and the Class A common shares are held by three inter vivos trusts.

Such shareholders are parties to a USA which provides inter alia that C, D, and E can each require B Ltd. to repurchase their Class B common shares for an amount not exceeding their FMV, and accords them an option to require B Ltd. to repurchase Class A common shares (i.e., of the trusts) in the event of specified deaths, for a price equal to their FMV, with the FMV in either case being determined at the time the repurchase agreement is entered into (rather than at the acquisition time).

Under the proposed transactions, the shareholders of B Ltd. will amend the USA to provide that for all such references to FMV, the reference will instead be to FMV calculated without regard to the repurchase agreement.

B Ltd. will then declare taxable dividends on its Class A and B shares, to be paid through the issuance of promissory notes and in amounts not exceeding the safe income attributable to the respective shareholdings.

CRA ruled that s. (a)(i)(B) of “short-term preferred share” and s. (f)(ii) of “taxable preferred share” will apply to such repurchases to the extent that the amount paid does not exceed the FMV of the shares, calculated without regard to the repurchase agreement, on the acquisition date specified therein.

These rulings do not seem meaningful. S. (a)(i)(A) of the STPS definition provides a safe harbour for an agreement to repurchase shares within 60 days of the agreement where the repurchase price does not exceed the greater of the FMV of the share at the time the agreement was entered into and at the time of the acquisition, in each case, determined without reference to the agreement. (f)(i) of the TPS definition is similar. The rulings do not accord any benefit to the repurchase agreements occurring for the FMV determined at the time of the repurchase agreement, and effectively indicate that the STPS or TPS definition will apply if, in fact, the repurchase price exceeds the FMV of the share at the acquisition time.

The addition of the references to FMV "determined without reference to the agreement" seems pedantic. In determining the purchase price for a common share that is to be repurchased for its FMV, such determination would become circular if that determination was to be made by reference to that agreement.

Neal Armstrong. Summary of 2024 Ruling 2023-0970691R3 F under s. 248(1) – taxable preferred share – (a)(i).