Class A shares of the corporation were issued in three different years (Years 1, 4 and 13). The annual rate of dividend on such shares (expressed as a percentage of the consideration for which they were issued) of 6% was higher than the prescribed rate of interest at the time of the issuance of the shares in Years 1 and 4 – although the corporation amended its articles after Year 4 and before Year 13 to reduce the dividend rate to 1%, which was the prescribed rate in Year 13 and less than the prescribed rate in Years 1 and 4.
In finding that this dividend-rate deduction did not satisfy s, 256(1.1)(d), CRA noted that its view is that the condition in paragraph 256(1.1)(d) of the Act must be met throughout the period that the shares in question are issued and outstanding.
Would the situation be remediated if the shareholder effected a s. 51 exchange of such Class A shares for Class B shares with the same attributes except for the fixed annual dividend rate (as a percentage of the fair market value of the consideration for which the shares were issued) equalling the prescribed rate at the time of the exchange? CRA stated:
We understand that the only Class B shares of the capital stock of the particular corporation that would be issued and outstanding would be the shares received by the shareholder on the exchange and that this issuance would take place on the exchange. Thus, depending on the facts, the fixed annual dividend rate, expressed as a percentage of the fair market value of the consideration for the issuance of the Class B shares, would not exceed the prescribed rate of interest on the issuance of the Class B shares. It is our understanding that the condition in paragraph 256(1.1)(d) would then be satisfied in respect of the newly issued Class B shares of the capital stock of the particular corporation. There is no specific provision in the Act, such as a tracking or tracing rule, that would allow the CRA to consider that the Class B shares of the capital stock of the particular corporation do not satisfy the condition in paragraph 256(1.1)(d) because the Class A shares of the capital stock of the particular corporation, exchanged for the Class B shares, did not satisfy the condition in paragraph 256(1.1)(d).
However, at the time of the exchange, the fair market value of the Class A shares and the Class B shares received in exchange should be ascertained in order to determine, inter alia, whether subsection 51(2) applies to the situation or whether the condition in paragraph 256(1.1)(e) is satisfied.