XXXX
K.H. Major (613) 995-1178
October 22, 1982
Dear XXXX
This is in reply to your letter of June 25, 1982 in which you requested the Department to reconsider its position with respect to the conditions, that must be attached to preferred shares (freeze shares) which are used by a taxpayer to freeze his interest in a family farm corporation.
As you are aware the Department's present position is that the freeze shares must be redeemable at the option of the holder (i.e. retractable). The loss of retractability is only acceptable under the following conditions:
(i) It is removed only on death and is lost in the estate of freezor.
(ii) The freeze shares become cumulative with a preferential dividend at a reasonable rate of return (e.g. 2/3 of prime adjusted quarterly).
(iii) There is a fixed plan of redemption over a period not exceeding 10 years and with at least 1/10 to be redeemed each year.
Additional restrictions on the freeze shares that might be considered to reduce their fair market value are not acceptable.
We are aware of the concerns expressed in your letter, that such a position could jeopardize the existence of the family farm corporation if the freezor wished to freeze such a corporation and to pass the freeze shares on his death to his children who did not participate in the farm operations.
However, to date we have not been made aware of an acceptable alternative for rights and conditions attaching to freeze shares to maintain their value both before and after death.
The solution you suggest in your letter in our opinion does not represent an acceptable alternative for the following reasons:
(a) The loss of retractability on death replaced by serial redemption over a period of not exceeding 15 to 20 years would cause a significant reduction in the value of the freeze shares (e.g. the present value of $1,000 received 15 or 20 years from now is significantly less than $1,000).
(b) When the freeze shares are valued at a point in time all the rights and conditions attaching to those shares at that time must be taken into account and the loss of retractability on death as set out in paragraph (a) above would detract from the value of the freeze shares in the hands of the freezor before his death.
(c) The loss in value as set out in paragraphs (a) and (b) above would pass on to the common shareholders (the persons in whose favour the freeze was made) and it would appear that there would be problems with the conveyance of benefits at the time of the freeze.
(d) The rollover rules provided in subsection 70(9.2) of Income Tax Act do nothing to assist us in solving the problem of maintaining the value of the freeze shares both before and after death.
(e) It is not clear what our position would be if on the loss of retractability the present value of the freeze shares was less than their adjusted cost base.
(f) Depending upon the present value of the freeze shares on death the freezor may not be treating all his children equably.
(g) Even the addition of a preferential cumulative dividend does not necessarily maintain the value of the freeze shares because the risk of investing the principle for such a long period of time would have to be considered but such a feature would add more value to the freeze shares.
In view of the valuation problem the Department will continue to follow its present practice with respect to the rights and conditions which must be attached to freeze shares when the retractability feature is lost on death.
We trust this information will be of assistance to you.
Yours truly,
for Director Specialty Corporations Rulings Division Corporate Rulings Directorate Legislation Branch