Principal Issues: Under the new Quebec Business Corporations Act, many classes of shares with identical characteristics may be created. Under the said Business Corporations Act, the issued and paid-up share capital of each of those classes is separate. For income tax purposes, should the paid-up capital of each of those classes be computed separately pursuant to subsection 89(1)?
How should a shareholder holding shares of each of those classes compute the adjusted cost base of each of these classes?
Position: If under the corporate law, the shares form part of two different classes, the paid-up capital of the shares of each class should be computed separately, class by class.
Subsection 47(1) may apply to the shares of separate classes of shares depending on whether the classes have the same characteristics. One of the characteristics to consider would be the rights to the issued and paid-up share capital in respect of shares of each class.
Reasons: The paid-up capital as defined in subsection 89(1) refers to any class of shares of the capital stock under the corporate law.
Text of paragraph 47(1)
FEDERAL TAX ROUNDTABLE
APFF CONFERENCE 2010
Question 23
New Québec Business Corporations Act
The new Québec Business Corporations Act ("QBCA") was passed on December 1, 2009 and will come into force shortly.
By virtue of section 49 of that Act, it is possible to create classes and series of shares with exactly the same rights and restrictions. Those classes or series have their own issued and paid-up share capital accounts by virtue of the QBCA.
(a) Can the CRA confirm that two identical classes of shares created under the QBCA would have their own paid-up capital for tax purposes?
(b) Will a taxpayer who owns shares of each class with exactly the same rights and restrictions be required to average the two classes to determine the taxpayer’s adjusted cost base?
CRA Response to Question 23(a)
The determination of the paid-up capital of a share of any class, as defined in ITA subsection 89(1), refers to the concept of "class of shares" of the capital stock of a corporation. Since the term "class of shares" is not defined in the Act, it is necessary to refer to the applicable corporate legislation to understand its meaning.
To the extent that shares with exactly the same rights and restrictions belong to two distinct classes under corporate law, the paid-up capital of each of those classes will be calculated separately.
CRA Response to Question 23(b)
For purposes of calculating adjusted cost base and subsection 47(1), the CRA would consider shares of different classes with exactly the same rights and restrictions to be identical properties even though they are of different classes of shares. Thus, a taxpayer holding such identical properties of two different classes would be required to determine the adjusted cost base of each of the shares, in accordance with subsection 47(1), by taking into account the total cost of the shares of all classes having exactly the same rights and restrictions and the total number of shares of those classes.
The question would therefore be whether, depending on the facts and circumstances of a particular situation, shares of different classes have exactly the same rights and restrictions. Among the rights that would require consideration in determining the differences, would be the right to the issued and paid-up capital respecting a share of one class as compared to that for another class.
Sylvie Labarre
(613) 946-5357
October 8, 2010
2010- 037330.