Principal Issues: Under the new Quebec Business Corporations Act, many classes of shares with identical characteristics may be created. For the purposes of computing the adjusted cost base (ACB) of shares of those classes, it is necessary to determine whether subsection 47(1) applies. One of the characteristics to consider for that purpose would be the rights to the issued and paid-up share capital in respect of shares of each class. Assuming that the issued and paid-up share capital for corporate law purposes is equal to the paid-up capital for income tax purposes, would shares of two classes issued by a corporation incorporated under the Quebec Business Corporations Act be identical for purposes of computing the ACB in a situation where the number of shares issued in each class is the same and where the issued and paid-up share capital of each class is different?
Position: The shares of one class would not be identical to the shares of the other class for purposes of computing the ACB of the shares.
Reasons: In the situation described in the principal issue, at least one of the characteristics of the shares of each class is different from each other.
FEDERAL TAX ROUNDTABLE 7 OCTOBER 2011
APFF CONFERENCE 2011
Question 8
Classes of identical shares under the new Quebec Business Corporations Act ("Q.B.C.A.")
At the October 2010 APFF Convention, a question (Footnote 1) regarding the calculation of adjusted cost base ("ACB") for different classes was submitted to the CRA as part of the Federal Tax Roundtable. The CRA's response included the following statement with respect to the concept of identical property:
"The question is therefore whether, according to the facts and circumstances of a particular situation, the shares of different classes have exactly the same rights and restrictions. Among the rights that should be considered when determining differences, there is the right to issued and paid-up capital in respect of a share of one class in relation to that in respect of another class." (our underlining)
Can you clarify the passage underlined above?
Do the Class A Shares and Class B Shares have identical properties for the purposes of calculating their ACB under subsection 47(1) in the following example:
Class A and Class B shares of the capital stock of a corporation incorporated under Q.B.C.A. have the following rights:
- Right to issued and paid-up capital;
- Participating;
- With voting rights;
- Right to remainder of assets in event of winding-up.
One hundred (100) Class A Shares are issued and outstanding. The issued and paid-up share capital account and the paid-up capital of the Class A Shares is $100,000.
One hundred (100) Class B Shares are issued and outstanding. The issued and paid-up share capital account and the paid-up capital of the Class B Shares is $100.
CRA Response
Given that, according to the information in the example, the issued and paid-up share capital of each class of shares of the capital stock of the particular corporation is equal to the paid-up capital of those classes, the CRA's response refers only to the paid-up capital.
The CRA is of the view that the issued and paid-up share capital attributable to a class of issued and outstanding shares of the capital stock of a corporation is an attribute of that class. Where the number of shares issued and outstanding for one class of the capital stock of a corporation is equal to the number of shares issued and outstanding for another class of the capital stock of the corporation and the two classes of issued and outstanding shares of the capital stock of the corporation have different issued and paid-up share capital, the issued and outstanding shares of one class have attributes different from the issued and outstanding shares of the other class and are not identical.
In the example submitted, the CRA would not consider a Class A share of the capital stock of the corporation to be identical to a Class B share of the capital stock of the same particular corporation, for purposes of calculating the ACB and subsection 47(1). Indeed, the issued and paid-up share capital of a Class A share of the capital stock of the particular corporation would be $1,000, while the issued and paid-up share capital of a Class B share of the capital stock of the particular corporation would be $1.
Sylvie Labarre
(613) 946-5357
2011- 041214
FOOTNOTES
Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:
1 " Federal Tax Roundtable", Association de planification fiscale et financière, Montreal, October 8, 2010, p. 40, question 23b)