Having regard to the exception in s. (f)(ii) of the taxable preferred share definition regarding the accommodation inter alia of a clause under which a person agrees to acquire the share for an amount not exceeding the FMV of the share at the time of the acquisition, and the comparable exception rule in s. (a) of the short-term preferred shares definition, CRA was asked various questions including:
- requested confirmation that the agreement of a corporation’s common shareholders as to redemption, tag-along or drag-along rights would not result, on exercise, in Part VI.1 tax because such rights would only be exercised at FMV; and
- whether, where a clause permitted a shareholder to redeem its common shares at FMV, the provision for further compensation in the event that there was a public offering within 12 months at a higher price would cause the exception not to be available.
CRA responded:
Depending on the circumstances, it is indeed possible that the conditions set out therein may be satisfied to the extent that an agreement relating to a share contains a provision that a person agrees to acquire the share for an amount not exceeding the FMV of the share at the time of the acquisition, determined without reference to the agreement.