| 24(1) | File No. 5-900260 |
| D.S. Delorey | |
| (613) 957-3495 | |
| 19(1) |
May 17, 1990
Dear Sirs:
Re: Rights Issued Under "Poison Pill" Plans Qualified Investments for Deferred Income Plans
This is in reply to your letter of March 19, 1990 asking if the above referenced rights qualify under paragraph 4900(1)(e) of the Income Tax Regulations (the "Regulations") as a qualified investment for a trust governed by a deferred income plan.
You describe a typical "poison pill" plan as one where
a) certain rights to acquire a corporation's common shares are distributed by the corporation to its shareholders,
b) the rights have a life of 5 to 10 years and trade with the common shares to the extent that the shares trade publicly,
c) the rights have an exercise (strike) price sufficiently high to make them worthless (e.g., $100 compared to a $25 market price),
d) the rights carry no votes and are redeemable at a nominal amount by the board of directors before the "poison pill" provisions are triggered or, in some cases, for a short period after the "poison pill" provisions become operative to allow the board of directors to negotiate an acceptable deal with an acquiror/maker (the "Acquirer") of a takeover bid, and
e) the "poison pill" provisions become operative upon the Acquiror acquiring a specified percentage of the shares of the corporation or a takeover bid being made for the shares of the corporation. (Usually the plan is not triggered in the case of a "permitted bid" so long as certain approvals were obtained by the corporation's board of directors).
You further mention that until one of the "triggering" events in (e) above occurs,
f) the rights cannot trade separately from the common shares, and
g) they are not separately traded on a stock exchange.
Our Comments
The Department's general position with respect to rights (warrants) to acquire shares is that the rights are not a qualified investment for a trust governed by a deferred income plan unless they trade separately and, as required under paragraph 4900(1)(e) of the Regulations, are listed on a prescribed stock exchange in Canada. It is therefore our view that rights of the type referred to above would not represent such a qualified investment prior to the "triggering" of the poison pill plan and then only if they trade them separately and are listed on a prescribed stock exchange in Canada.
With respect to your question concerning the possible application of subsections 146(6) and (10) of the Income Tax Act (the "Act") to transactions involving the above described rights, our comments made at the 1983 Canadian Tax Foundation conference (which you mention in your letter) remain relevant. That is, where a non-qualified right is acquired as part of a unit consisting of the right and a share that is a qualified investment and the right is disposed of shortly after acquisition in the same calendar year, and provided there is no significant difference between the fair market value ("FMV") of the right on acquisition and the proceeds of disposition thereof, the provisions of subsections 146(6) and (10) of the Act will not be applied to the transactions. The application of subsection 146(10) (and thus 146(6)) becomes academic if the rights have a nil FMV on the date of their acquisition. However, notwithstanding the comments in (c) above, the FMV of a property at any given time is a question of fact.
The above comments are an expression of opinion only and are not binding on the Department, as explained in paragraph 24 of Information Circular 70-6R. We trust however that they are of assistance to you.
Yours truly,
for DirectorFinancial IndustriesRulings Director