Principal Issues: [TaxInterpretations translation] Can the CRA define what it considers to be an "arrangement" and when it considers the arrangement to have ended for the purposes of Reg. subsection 6205(2)?
Position: Neither.
Reasons: The questions of what constitutes an arrangement in a particular given situation and, in the context of that situation, when that arrangement comes to an end, are ones of fact. In addition, the CRA has not developed guidelines on what constitutes an arrangement for the purpose of this Regulation. However, we could consider this issue as part of an advance ruling respecting a particular situation.
APFF- FINANCIAL STRATEGIES AND INSTRUMENTS ROUNDTABLE 5 OCTOBER 2012 2012 APFF CONFERENCE
Question 16
ITA subsection 110.6(8) ITA and ITR subsection 6205(2)
In order to lessen the tax consequences associated with the application of ITA subsection 110.6(8), the prescribed share concept was provided. Essentially, the concept of prescribed shares is defined in subsection 6205(1) of the Income Tax Regulations ("ITR") and refers to two broad classes of shares, pure common shares and preferred shares issued in certain circumstances defined in ITR subsection 6205(2). That latter subsection primarily addresses preferred shares issued in a freeze to certain persons such as an employee of a corporation. An employee who wishes to subscribe for treasury shares issued by the corporation would not be able to benefit from subsection 6205(2) by reason of clause 6205(2)(a)(ii)(B).
However, such an employee who subscribed directly for the shares, and in the future transferred them to a new corporation could benefit from subsection 6205(2) to the extent that that transaction did not occur under the same arrangement.
Question to the CRA
In the situation described above, can the CRA define what it considers to be an "arrangement" and when it can be considered that the arrangement has expired for the purposes of subsection 6205(2) ITR?
CRA Response
For the purposes of the ITA and ITR, no definition of the word arrangement is provided. We must therefore rely on the ordinary meaning of that word.
Le Nouveau Petit Robert defines the word "arrangement" as follows: [TaxInterpretations translation] action of arranging; its result 1. Action to dispose in a certain order; the resulting disposition. 2. Action taken to arrange, prepare something. Agreement between individuals or communities to settle a legal situation.
Furthermore, the Standard Encyclopedic Dictionary defines that term as follows: 1. The act of arranging, or the state of being arranged; disposition. 2. That which is arranged. 3. The style something is arranged; order. 4. ...5. Usually pl. The plans or preparations made, or measures taken, for a particular purpose.
The CRA is of the view that the purpose of the provisions of ITR subsection 6205(2) is to grant the status of "prescribed shares", for purposes of ITA subsection 110.6(8), to shares issued pursuant to an arrangement the primary purpose of which is to effect a total or partial freeze in favour of persons not dealing at arm's length with the shareholder effecting the freeze, employees of the corporation or a corporation controlled by it, or a combination of such persons and employees. The question of whether the primary purpose of an arrangement is to ensure that the increase in the value of a corporation's property is attributed to "other shares" is a question of fact. An arrangement could have been put in place primarily for purposes other than those provided in paragraph 6205(2)(a), including to achieve certain financial, structural or other objectives, or to obtain certain tax benefits.
The questions of what constitutes an arrangement in a particular situation and, secondly, when that arrangement ends, are ones of fact. In addition, the CRA has not developed guidelines on what constitutes an arrangement for the purposes of subsection 6205(2) ITR. However, we could consider this issue as part of an advance ruling for a particular situation.
Danielle Bouffard
(613) 590-2155
2012-045402