Principal Issues: Whether the position stated in 2004-0092561E5 is still valid considering new subsection 49(3) of the Quebec Corporations Act under which two or more classes of shares with the same rights, privileges, conditions and restrictions may be issued?
Position: Yes.
Reasons: Previous positions.
APFF FEDERAL TAX ROUNDTABLE 11 OCTOBER 2013
APFF CONFERENCE 2013
Question 13
Subsection 85(1) and transactions targeting cost isolation
Subsection 85(1) permits the transfer by a taxpayer of "eligible property" (as provided in subsection 85(1.1)) to a "taxable Canadian corporation" (as defined in subsection 89(1)) without immediate tax implications. To qualify, it is necessary for the consideration received by the taxpayer in respect of the disposition of the property to include at least one share of the capital stock of the corporation. This subsection is commonly used in various plans.
Subsection 85(1) is used in internal rollovers to isolate the cost of preferred shares of a corporation. In this planning, the taxpayer transfers, to the corporation, common shares held in its capital in exchange for the issuance of preferred shares and common shares of the corporation. The cost of the transferred common shares is thereby isolated in the newly issued preferred shares.
In a 2004 Technical Interpretation (footnote 1), the CRA confirmed its position that it is possible:
“that a transaction respecting a particular share of the capital stock of a particular corporation held by a taxpayer is not a disposition where after the transaction the taxpayer has another share of the capital stock of the particular corporation having rights, privileges, restrictions and conditions identical to the rights, privileges, restrictions and conditions attached to the particular share.”
More specifically, the position of the CRA was that there was no disposition of the transferred common shares since they had the same rights and restrictions as the newly issued common shares, and the preferred shares had simply been subscribed for.
On May 16, 2012, the [Quebec Business Corporations Act] BCA came into effect. The BCA amends the corporate law previously in force in Quebec by expressly providing in subsection 49(3) that the articles of a corporation may provide that the shares of two or more classes or two or more series of the same class carry the same rights and restrictions.
Question to the CRA
Would the CRA apply its position in the Technical Interpretation referred to above to separate classes of shares issued under the BCA having the same rights and restrictions?
CRA response
Yes. Our approach is based on the fact that we consider the participation of a shareholder in the share capital of a corporation as being intangible property constituting the collection of the rights and conditions ("bundle of rights") respecting the shares, in accordance with the articles and relevant corporate law.
The CRA applies the same position as stated in the above-noted Technical Interpretation if, by virtue of the BCA, a share of a given class issued in exchange for a share of a different class of shares has the same rights, privileges, conditions and restrictions as the share of the other class.
Marc Séguin
2013-049582
FOOTNOTES
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 2004-0092561E5