Principal Issues: [TaxInterpretations translation] A shareholders' agreement gives children the right to acquire the shares of a farm corporation for $1 after their father's death. If the children exercise their right to purchase, are those shares transferred or distributed to the children as a consequence of the father's death for the purposes of subsection 70(9.2)?
Position: The acquisition of the shares by a child would be as a consequence of the exercise of the purchase right arising on death and not as a consequence of the death of the father.
Reasons: At the time of death, the children are given the choice of whether or not to acquire the father's shares. The acquisition of the shares results from the exercise of that choice.
Financial Strategies and Financial Instruments Roundtable
2006 APFF CONFERENCE
Question 11
Rollover of shares of a farm corporation to children under subsection 70(9.2) I.T.A.
A father owns 60% of the common shares of the capital stock of a family farm corporation within the meaning of subsection 70(10), while his two sons each own 20% of the balance.
A shareholders' agreement was entered into between the father and his two children. One of the clauses of that agreement stipulates that upon the father's death, the surviving shareholders (the father's children) have the right to purchase for $1 the shares that the father will hold at the time of his death.
a) Assuming all other requirements of subsection 70(9.2) are satisfied, do the shares of the deceased father, acquired by the children pursuant to the clause in the shareholders' agreement giving them the right to purchase them for $1, qualify for the rollover under subsection 70(9.2)?
b) Would your answer be the same if, in addition to the shareholders' agreement, the father's will contained a similar clause to the same effect?
CRA Response
(a) One of the conditions for subsection 70(9.2) to apply in respect of a share of the capital stock of a family farm corporation of the taxpayer is that the share be, as a consequence of the taxpayer's death, transferred or distributed [attribuée] (distributed [distribuée] under the July 18, 2005 proposed amendments) to a child of the taxpayer.
The question is therefore whether the shares acquired by a child under the shareholders' agreement clause were transferred or distributed as a consequence of the father's death. According to the shareholders' agreement, at the time of death, the children received a right to acquire the shares for $1 and they had no obligation to acquire them. We are of the view that the acquisition of the shares by a child would be a result of the exercise of the right to purchase arising on death, and not be a consequence of the death of the father. Consequently, subsection 70(9.2) would not apply in respect of that acquisition by the child. On the other hand, it is possible that, in certain situations, the shares were transferred to a beneficiary of the estate and vested indefeasibly in that beneficiary before the sale to the children that was provided for in the shareholders' agreement. It would then be necessary to examine whether the conditions of subsection 70(9.2) were then satisfied with respect to the transfer to the beneficiary of the estate.
(b) It is difficult for us to answer this question as we do not have the wording of the clause in the will or the shareholders' agreement. In a particular situation, we would examine those documents to determine whether the shares are acquired under or as a consequence of the will or whether they are acquired under or as a result of the exercise of the right to purchase granted to the children by the shareholders' agreement.
If the shares were acquired under or as a result of the exercise of the right to purchase granted by the shareholders' agreement, the answer would be the same even if the will includes a reference to the shareholders' agreement. On the other hand, if the shares were acquired under or as a consequence of the will rather than under the shareholders' agreement, subsection 248(8) would apply and the shares would be considered transferred as a consequence of the father's death. If all other conditions of subsection 70(9.2) were satisfied, the rollover under that subsection would apply.
Sylvie Labarre
(613) 957-8981
October 6, 2006
2006-019715