XXXX
C. G. Toussaint (613) 995-1178
ATTENTION: XXXX
NOV 16 1983
Dear Sirs:
This is in reply to your letter dated October 31, 1983 wherein you request our opinion on the two possible methods described hereinafter, of reorganizing the capital stock of a company.
You described the following situation:
A number of shareholders who together hold more than fifty percent of the voting shares of a public company, contemplate to have the public company to split of the issued voting and non-voting shares in such a manner that after the reorganization each non-voting share will have been changed into six new non-voting shares and each voting share will have been changed into five new non-voting shares and one new voting share convertible to one new non-voting share on a one for one basis. The two methods contemplated are:
Method A
1) Split the original non-voting shares into six non-voting shares for each share held.
2) Divide each existing voting share into six equal voting shares designated as Series 1, 2, 3, 4, 5 and 6.
3) Change each voting share designated as Series 1, 2, 3, 4 and 5 into new non-voting shares.
4) Change each Series 6 voting share into a new voting share convertible to a new non-voting share on a one for one basis.
Method B
1) Declare and pay a stock dividend on the non-voting and voting shares on the basis of one new non-voting share for each non-voting share and one new voting share for each voting share.
2) Change each original non-voting share into five new non-voting shares.
3) Change each original voting share into five new non-voting shares.
Our comments It is our view that the series of transactions described above achieve an unwanted result since it artificially or unduly reduces the amount of the gain on the disposition of the new non-voting shares received in exchange of voting shares. Therefore, we would refuse to rule on these proposed transactions (either method A or B). If the transactions are completed, we would contemplate the application of subsection 55(1) of the Income Tax Act on the subsequent sale of the new non-voting shares received in exchange of the voting shares.
Yours truly,
for Director Corporate Rulings Division Legislation Branch