Dear Sirs:
Re: Subsection 256(1.1) of the Income Tax Act (the "Act")
This is in reply to your letter of May 13, 1991 in which you requested our interpretation of the provisions of subsection 256(1.1) of the Act as it applied to the two questions mentioned in your letter.
Question 1
Whether paragraph 256(1.l)(c) of the Act requires that the share- issued be entitled to a dividend or not. For example would it be acceptable to issue a preferred share that did not provide for any dividend entitlement and still be a specified share assuming the other conditions stipulated in subsection 256(1.1) of the Act were satisfied.
It is your opinion that nil could be regarded as a fixed amount or the fixed percentage referred to in paragraph 256(1.1)(c) of the Act could be regarded as nil. Question 2.
The shares when issued are non-voting shares, but which can become voting upon the happening of some future contingent event, and the other conditions stipulated in subsection 256(1.1) of the Act were satisfied.
It is expected by you that the share would remain a specified share until at least the happening of that future event at which time the shares would become voting and thus cease at that time to qualify as a specified share.
Opinions
We agree with your opinion regarding question 1, that if the shares are issued with no dividend entitlement, and provided, that in no event will there be compensation of any other form or equity participation, other than a return of capital, these shares will meet the test in paragraph 256(1.1)(c) of the Act.
In answer to question 2, it is our view that the tests in subsection 256(1.1) of the Act is relevant throughout the period that the shares in question are outstanding. Consequently, if the terms or conditions of the shares or any agreement in respect thereof would provide that the shares will become exchangeable from non-voting to voting shares under any circumstance, the tests in paragraphs 256(1.1)(a) and (b) of the Act will not have been met from the time when the shares were issued.
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