June 14, 1991
Dear Sirs:
We are writing in response to your letter dated April 11, 1991 wherein you requested a technical interpretation regarding the application of subsection 256(1.4) and paragraph 251(5)(b) of the Income Tax Act (Canada) (the "Act") to the provisions of various shareholder agreements as described in your letter.
It appears that the interpretation you seek relates to a specific taxpayer and, therefore, we bring to your attention Information Circular 70-6R2 dated September 28, 1990 issued by Revenue Canada, Taxation. Confirmation with respect to proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. If you wish to obtain an advance income tax ruling for a particular taxpayer with respect to specific transactions which are contemplated, a written request for an advance income tax ruling can be submitted in accordance with the Information Circular. Nevertheless, we can offer the following general comments.
In each particular situation, the provisions of any shareholders agreement would have to be reviewed to determine whether or not a shareholder receives a right or obligation to purchase the shares of another shareholder. However, as stated in paragraph 31 of Interpretation Bulletin IT-64R2 and our response to question 42 at the 1988 Revenue Canada Roundtable, the Department will generally not apply the provisions of paragraph 251(5)(b) or subsection 256(1.4) to shareholder agreements commonly referred to as "the right of first refusal".
The foregoing comments are given in accordance with the guidelines set out in paragraph 21 of Information Circular 70-6R2.
Yours truly,
Reorganizations and Non-Resident Division Rulings Directorate Legislative and Intergovernmental Affairs Branch