| E7765 | |
| 5-903397 | |
| D.J. Powrie | |
| (613) 957-2109 |
24(1)
Attention: 19(1)
Dear Sirs:
Re: Shareholder Agreements and paragraph 251(5)(b) of the Income Tax Act (the "Act")
This is in reply to your letter, dated November 26, 1990, whereby you requested a technical interpretation regarding the application of paragraph 251(5)(b) to certain provisions commonly found in shareholder agreements as described below:
Shareholder agreements often provide that, when a shareholder defaults in performing certain obligations (for example, pledges or hypothecates his shares as security, allows his shares to be seized or encumbered for a creditor or perhaps a spouse pursuant to a matrimonial property action), the non-defaulting shareholder has the option, but not the obligation, to acquire the shares of the defaulting shareholder.
You requested our opinion as to whether paragraph 251(5)(b) of the Act applies to such arrangements, thereby deeming the shareholder who has the option to buy the shares of the defaulting shareholder to be, for the purposes of paragraph 125(7)(b) and subsection 251(2) of the Act, in the same position in relation to the control of the corporation as if he owned the shares.
Our comments
We will not extend the administrative treatment (outlined in paragraph 8 of Interpretation Bulleting IT-419) that we give to a right of first refusal or a shotgun arrangement to the type of default buy-sell provision described above. In our view paragraph 251(5)(b) applies in the situation outlined above.
The foregoing comments are given in accordance with the practice referred to in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990 and are not binding on Revenue Canada, Taxation.
Yours truly,
for DirectorReorganizations and Non-resident DivisionRulings DirectorateLegislative and IntergovernmentalAffairs Branch