Principal Issues: One of the requirements of subsection 86(1) is that the disposition of the shares must be "in the course of a reorganization of the capital of a corporation". Whether this requirement can be met in the context of a transaction permitted by new subsection 91 of the Business Corporations Act, R.S.Q., c. S-31.1.
Position: Subsection 51(1) of the Act, rather than subsection 86(1), should apply in this context.
Reasons: Wording of the Act and previous positions.
FEDERAL TAX ROUNDTABLE 7 OCTOBER 2011
APFF CONFERENCE 2011
Question 27
The conversion of shares in light of the new Q.B.C.A.
Section 91 of the new Q.B.C.A. [Quebec Business Corporations Act] permits a corporation to convert the shares of a particular class into shares of a new class. Q.B.C.A. section 91 provides that that conversion is effected by a simple resolution of the board of directors. No filing of articles of amendment is required unless this is necessary to change the authorized share capital on the conversion. Quebec legislation is therefore more flexible than the Canada Business Corporations Act, where the conversion of issued and outstanding shares requires the filing of articles of amendment, whereas the Quebec legislation only requires the adoption of a resolution by the board.
Question to the CRA
Is the CRA prepared to recognize that a conversion made pursuant to Q.B.C.A. section 91 can be considered an exchange of shares by a shareholder in the course of a reorganization of the capital within the meaning of section 86 of the Act?
CRA Response
Q.B.C.A. section 91 provides that the board of directors may convert shares of any class or series into shares of any other class or series. It also states that the conversion must not increase or decrease the amount paid up or payable on the corporation’s issued shares. In addition, such conversion must be approved by special resolution. For its part, Q.B.C.A. section 92 provides that any amendment to the authorized share capital, arising, among other things, from a conversion, must be set out in articles of amendment.
The words "in the course of a reorganization of the capital of a corporation" used in subsection 86(1) are not defined in Act. Consequently, the question of whether a taxpayer disposed of capital property that consisted of all the shares of a particular class of the capital stock of a corporation "in the course of a reorganization of the capital" of that corporation remains a question of fact, which can only be determined after an examination of all the facts and circumstances surrounding a particular situation.
In general, the CRA is of the view that capital will be reorganized for the purposes of section 86 in the situation where the provisions of the corporation's incorporating act require an amendment of its articles.
In a situation where, for tax purposes, there is a disposition of a share held by a taxpayer resulting from a conversion permitted by Q.B.C.A. section 91, we believe that such a transaction would normally come within subsection 51(1), an automatic rollover provision. We are also of the view that the conversion provided for in Q.B.C.A. section 91 should not be considered as being made "in the course of a reorganization of the capital of a corporation". Section 86 would therefore be inapplicable.
Furthermore, it should be noted that by virtue of subsection 51(4), section 86 takes precedence over subsection 51(1). Thus, an interpretation that would enable the application of section 86 to transactions permitted by Q.B.C.A. section 91would significantly restricts the scope of subsection 51(1). That does not seem appropriate or desirable.
Urszula Chalupa
(613) 957-2124
October 7, 2011
2011-041219