PRINCIPAL ISSUE SHEET - QUESTION ON PAGE 27 FOR THE 1991 CANADIAN TAX
FOUNDATION ROUND TABLEIssue
In responding to this query it was assumed that at the time the preferred shares were issued, the holder had the option of converting them into common shares at a preset ratio, or they could be redeemed for a preset amount of cash. The question then was whether a subsequent conversion of the preferred share to common shares at a time when the value of the common shares had increased to a level higher than the amount for which the preferred shares could be redeemed, would trigger a subsection 15(1) benefit to the shareholder.
Position
If the conversion ratio was originally set at fair market value, it was our view that no 15(1) benefit would be conferred on the subsequent conversion of the preferred share into common shares. However, if the original conversion ratio was not set at fair market value, then it is possible that 15(1) could apply. For instance, if a taxpayer paid S100 to acquire preferred shares that were immediately convertible into common shares having a fair market value of S150, it is possible that 15(1) could apply, depending of the facts in the particular circumstances.
This is the same question and response given for Q.23 of the Vancouver D.O. Round Table - September, 1991.
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