5-911255
This is in reply to your letter of May 3, 1991 wherein you ask for our opinion regarding shares held by a Canadian chartered bank and the "term preferred shares" rules.
As we understand it your concerns is whether an agreement such as that described below would, in and of itself, cause common shares of a Canadian controlled private corporation ("CCPC") to be term preferred shares ("TPS")
24(1)
You requested our opinion as to whether the arrangements described above would result in the 24(1) being characterized as
result ln the 24(1) being characterized as TPS by virtue of subparagraph (a)(iii) of the definition thereof in subsection 248(1) of the Income Tax Act (the "Act").
Commentary
Since the subject matter of your inquiry seems to relate to a factual situation, we cannot provide you with a specific opinion otherwise than by way of an advance income tax ruling. An advance income tax ruling may be provided in accordance with Information Circular 70-6R2 dated September 28, l990, in respect of proposed transactions. As mentioned in paragraph 21 of the Information Circular, the district offices consider requests for written opinions on completed transactions. While it is not possible to provide you with a definitive opinion as to whether the common shares described in your letter can be excluded from the TPS definition in the Act, we can provide the following general comments
Subparagraph (a)(iii) of the definition of TPS in subsection 248(1) of the Act states that a TPS of a corporation means, in the case of a share issued after November 16, 1978, a share of the capital stock of the issuing corporation if under the terms or conditions of the share, any agreement relating to the share or any modification of such terms, conditions or agreement, the issuing corporation or any person or partnership provides or may be required to provide any form of guaranty, security or similar indemnity or covenant with respect to the share
The wording of this provision is very broad and could apply to any form of guaranty, security etc with respect to a share. ln our opinion, a shareholders' agreement which provides that a shareholder or group of shareholders may be required to purchase the shares of another shareholder at their fair market value, or face the prospect of having to sell their own shares at fair market value, is a form of guaranty or security with respect to the share referred to in the TPS definition. The fact that the shareholders may decline to purchase the shares may preclude the application of subparagraph (a)(ii) of the definition; however, such a share would still be caught by subparagraph (a)(iii) of the definition in our view.
The views expressed herein do not constitute an advance income tax ruling and, as stated in paragraph 21 of Information Circular 70-6R2, are not binding on the department.
Yours truly,
for the DirectorBilingual Services & Resource Industries DivisionRuling Directorate