Principal Issues: Provide examples of clauses in a shareholders agreement that would reduce the FMV of freeze shares.
Position: Gave the following three examples
Reasons: The FMV of freeze shares is negatively affected by such clauses.
CRA- ROUNDTABLE
CTF – TAXATION CONFERENCE 2011
Question 1
In the context of an estate freeze, the CRA indicated (in particular, in its response to Question 23 of the 2008 APFF Federal Tax Roundtable, our document number 2008-0285241C6, hereinafter the "2008 Technical Interpretation") the attributes that freeze preferred shares should have in order that their value can be protected. In the 2008 Technical Interpretation, the CRA also noted that a shareholders' agreement should not contain clauses that would have the effect of reducing the value of the freeze preferred shares.
Questions to the CRA
1. Could you provide examples of clauses in a shareholder agreement (unanimous or otherwise) that you believe would decrease the value of the freeze preferred shares?
2. In your view, is there a clause allowing the corporation in question, in the case of redemption at the option of the shareholder holding the freeze preferred shares, to effect that redemption with a note payable over a term of XX years, that would have the effect of reducing the value of the freeze preferred shares?
3. Would your answer to question 2 change if that note bore interest (a) at the prescribed rate? (b) at a reasonable commercial rate?
CRA Response
The 2008 Technical Interpretation to which you refer states in particular that “one of the concerns of the CRA with respect to estate freezes, is to ensure that the total FMV of the consideration received in freeze preferred shares and property other than shares, is equal to the FMV of the common shares exchanged, so that there is no benefit conferred by the author of the freeze in favour of a related person.”
Furthermore, the 2008 Technical Interpretation stresses that the clauses of a shareholders' agreement must not result in a reduction of the FMV of the freeze preferred shares.
In that regard, generally, we consider that a clause in a shareholders agreement (unanimous or otherwise) results in a reduction in the FMV of the freeze preferred shares where such a clause provides inter alia that:
- The holder of the freeze preferred shares agrees not to redeem all of its shares at the same time;
- The holder of the freeze preferred shares undertakes not to request the redemption of the holder’s shares without the agreement of all shareholders of the corporation; or,
- The holder of the freeze preferred shares agrees to accept as payment for the redemption of the freeze preferred shares a term note that does not bear interest at a rate that in the circumstances is a reasonable commercial rate.
Marc LeBlond
(613) 957-2108
June 10, 2011
2011-040464