900285
M. Sarazin
(613) 957-209224(1) 19(1)
Dear Sirs:
Re: Paragraph 251(5)(b) of the Income Tax Act (Canada) (the "Act")
We are writing in response to your letter dated April 2, 1990 in which you requested a technical interpretation on the application of paragraph 251(5)(b) of the Act to the following hypothetical situation.
Facts
1. Xco. is a "Canadian corporation" within the meaning of paragraph 89(1)(a) of the Act, with 100 common shares issued and outstanding.
2. Mr. NR, a non-resident, owns 49 common shares, Mr. Bowns 41 common shares and Mr. C owns 10 common shares. Mr. B and Mr. C are residents of Canada.
3. The shareholders wish to enter into an unanimous shareholders' agreement whereby the existing shareholders will be granted a preemptive right to subscribe for their proportionate share of all future share offerings by XCo.
Opinions
We agree with your submission that a pre-emptive right, similar to the one described above, which is to be acquired by all existing shareholders would be regarded as an option to acquire, in certain future circumstance, a right to acquire a share as set forth in Interpretation Bulletin IT-64R2 at paragraph 31. In order to conclude as such, we have assumed that there are no additional agreements between shareholders and no existing condition which may alter any shareholder's ability to exercise his pre-emptive right.
Accordingly, we would not generally consider a pre-emptive right, in and by itself, to be a right described in paragraph 251(5)(b) of the Act.
The foregoing comments represent our general views with respect to the subject matter of your letter. The facts of a particular situation may lead to a different conclusion. The foregoing opinions are not rulings and, in accordance with the guidelines set out in Information Circular 70-6R dated December 18, 1978, are not binding on the Department.
Yours truly,
for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch