Dear Sirs:
Re: Subsection 256(1.1) of the Income Tax Act (the "Act")
This is in reply to your letter of August 12, 1991 in which you raised a question relating to our interpretation of the provisions of paragraph 256(1.1)(b) of the Act.
The question raised by you is whether shares which are non-voting shares when issued, but include a clause or condition that they will become voting if changes were to be made in the share structure of the corporation, would cause these shares not to meet the conditions stipulated in subsection 256(1.1) of the Act.
You have also pointed out that under various business corporations acts such as the Canada Business Corporations Act, shares are given a right to vote in certain circumstances whether or not they otherwise carry the right to vote.
Opinion
It is our view that the tests in subsection 256(1.1) of the Act are relevant throughout the period that the shares in question are outstanding. Therefore, the inclusion of a clause as part of the terms or conditions of the shares or any agreement in respect thereof which would provide that the shares will become exchangeable from non-voting to voting shares under certain circumstances, will result in the tests in paragraphs 256(1.1)(a) and (b) of the Act not being met from the time when the shares were issued.
However, in the case where the right to vote in certain circumstances is inherent in the respective business corporations acts and was not included as part of the terms or conditions of the shares or any agreement in respect of the shares, it is our opinion that such right will not disqualify these shares from being shares of a "specified class" if they have otherwise met all the. conditions in subsection 256(1.1) of the Act
The foregoing comments represent our general views with respect to the subject matter of your letter. The facts of a particular situation may lead to a different conclusion. In accordance with paragraph 21 of Information Circular 70-6R2 the comments expressed herein do not constitute an advance income tax ruling and consequently are not binding on the Department.
Yours truly,
for DirectorReorganizations and Non-Resident DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch