Opco, a mooted Canadian-controlled private corporation, is capitalized with 1 million common shares, with a fair market value (FMV) of $2 million, that are held by a resident Canadian, and with a $5 million debenture held by a non-resident. The debenture is convertible by the holder, in the event that Opco proceeds to a second round of financing, into that number of Opco common shares which, at that time, have an FMV of $5 million. How would CRA apply s. 251(5)(b)? CRA responded:
By virtue of subparagraph 251(5)(b)(i) and because of the conversion right for the debenture as described in this question, the non-resident investor would be deemed, at a particular time, to be in the same position in relation to the control of Opco control as if it were the owner of the shares of the capital stock of Opco to which the conversion right applied at that time. To calculate the conversion ratio upon exercise of the conversion right of the debenture at that time, and consequently the number of shares to be issued to the non-resident investor, the fair market value of the common shares of the capital stock of Opco then outstanding should be used.
The determination of fair market value can only be made after considering all of the relevant circumstances and facts relevant to a particular situation.