Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues: Whether a discount of up to 5% offered under a dividend reinvestment plan is taxable as a benefit to the shareholder under subsection 15(1).
Position: No.
Reasons: Long standing administrative position.
XXXXXXXXXX 2001-011537
XXXXXXXXXX, 2002
Dear XXXXXXXXXX:
Re: XXXXXXXXXX
This is in reply to your letters of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of XXXXXXXXXX.
DEFINITIONS
In this letter, the following terms have the meaning specified:
- unless otherwise indicated, all references to a statute are to the Income Tax Act, R.S.C. 1985, c.1 (5th Supp.), as amended to the date hereof (the "Act");
- "taxable dividend" has the meaning assigned by subsection 89(1);
- "taxable Canadian corporation" has the meaning assigned by subsection 89(1);and
- "public corporation" has the meaning assigned by subsection 89(1).
Our understanding of the relevant facts, purposes of the proposed transactions and proposed transactions is as follows:
FACTS
1. XXXXXXXXXX ("Pubco") is a taxable Canadian corporation and a public corporation, with shares listed on XXXXXXXXXX Stock Exchange and other exchanges. XXXXXXXXXX Pubco's business number is XXXXXXXXXX, its tax services office is XXXXXXXXXX and its taxation centre is the XXXXXXXXXX Taxation Centre.
2. As at XXXXXXXXXX, Pubco had XXXXXXXXXX common shares issued and outstanding.
3. The recent dividend history of the common shares of Pubco is as follows:
Fiscal Year
Annual Dividends Per Share*
XXXXXXXX
XXXXXXXXXX
XXXXXXX
XXXXXXXXXX
XXXXXXX
XXXXXXXXXX
XXXXXXX
XXXXXXXXXX
XXXXXXX
XXXXXXXXXX
XXXXXXX
XXXXXXXXXX
XXXXXXX
XXXXXXXXXX
* restated to reflect a stock dividend paid XXXXXXXXXX
4. XXXXXXXXXX.
PROPOSED TRANSACTIONS
5. Pubco will offer to holders of its common shares the right to purchase additional common shares of Pubco in accordance with the terms of a plan (the "Plan"). Common shares acquired under the Plan will either be issued from the treasury of Pubco or purchased on the open market at the option of Pubco.
6. The material provisions of the Plan will be:
i. Participants - All registered holders and beneficial holders of common shares whose shares are held in a registered account are eligible to participate, provided that:
(a) holders resident in countries other than Canada and the United States may participate if such participation is in compliance with the laws and regulations of the country in which they reside, and
(b) participation may be denied to (x) shareholders that Pubco has reason to believe have been engaging in market activities or have been artificially accumulating shares of Pubco for the purpose of taking undue advantage of the Plan to the detriment of Pubco, or (y) shareholders whose participation in the Plan would contravene restrictions in the XXXXXXXXXX.
ii. Options - The Plan has the following dividend reinvestment and share purchase options:
(a) Option 1 entitles holders to purchase additional common shares of Pubco by way of the reinvestment of cash dividends. Shares purchased under this option are automatically enrolled in Option 1 and all participants in Option 1 automatically qualify for Option 2; and
(b) Option 2 entitles holders to purchase additional common shares of Pubco up to an aggregate purchase price of $XXXXXXXXXX per quarter. Shares purchased under this option are automatically enrolled in Option 1.
iii. Purchase Price - Common shares acquired under the Plan will be priced as follows:
(a) Common shares acquired under Option 1 of the Plan will be priced (x) at market price if purchased on the open market, or (y) at the "Average Market Price" if purchased from the treasury of Pubco. If purchased from treasury, there may also be a discount (the "Discount") of up to 5% of the Average Market Price. There will be no Discount offered in respect of shares which are purchased on the open market.
Average Market Price is the daily average of weighted average prices for trades of board lots of common shares on XXXXXXXXXX Stock Exchange during each of the five trading days before the relevant dividend payment date or investment date; and
(b) Common Shares acquired under Option 2 of the Plan will be priced (x) at market price if purchased on the open market, or (y) at the Average Market Price if purchased from treasury. If Pubco satisfies itself as to relevant regulatory and other matters, it may implement a discount of up to XXXXXXXXXX% of the Average Market Price on common shares purchased from treasury.
ADDITIONAL INFORMATION
7. The Plan will comply with securities laws in Canada and the United States.
8. XXXXXXXXXX.
9. The amount of the Discount will be determined by Pubco from time to time and will not exceed the amount which Pubco estimates is necessary to achieve a shareholder participation rate sufficient to meet its capital requirements. When Option 1 of the Plan is instituted, the Discount will be set at XXXXXXXXXX%.
10. No charges or brokerage commissions will be levied by Pubco or the Plan agent for participation in the Plan and Pubco will not incur underwriting commissions in connection with the Plan.
PURPOSE OF PROPOSED TRANSACTIONS
11. The purpose of the Proposed Transactions is to
XXXXXXXXXX.
RULINGS
Provided that the above statements constitute a complete and accurate disclosure of all the relevant facts, purposes of the proposed transactions and proposed transactions, we rule as follows:
A. The amount of cash dividends which are reinvested in common shares of Pubco pursuant to the Plan will be treated as taxable dividends received by the participants for purposes of subsection 82(1).
B. No amount will be required to be included in computing the income of a participant in the Plan pursuant to subsection 15(1) of the Act by virtue of the grant of rights under Option 1 of the Plan or the purchase of shares pursuant to Option 1 of the Plan.
C. No amount will be required to be withheld under Part XIII of the Act by virtue of the grant of rights under Option 1 of the Plan or the purchase of shares under Option 1 of the Plan.
D. The provisions of subsection 246(1) will not apply in respect of Option 1 of the Plan.
E. The cost to a participant of common shares purchased pursuant to Option 1 of the Plan will be the price described in paragraph 6 above.
These rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R4 issued on January 29, 2001, and are binding on the Canada Customs and Revenue Agency provided that the proposed transactions are completed before XXXXXXXXXX.
The above rulings are based on the Act in its present form and do not taken into account any proposed amendments to the Act, which if enacted, could have an effect on the rulings provided herein.
COMMENTS
1. Nothing in this ruling should be construed as implying that the Canada Customs and Revenue Agency has agreed to or reviewed:
(a) the determination of the adjusted cost base, the paid-up capital or fair market value of any shares referred to herein; or
(b) any tax consequences relating to the facts and proposed transactions described herein other than those described in the rulings given above.
2. In particular, we are not commenting on the tax consequences of any Discount offered under Option 2 of the Plan.
Yours truly,
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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