(The document below has been translated from French to English).
Date: December 18, 2013
2013 – 0511101E5 interest Substantial – Part VI.1
Please note that this document, although correct at the time of release, may not represent the current position of the CRA.
MAIN issues: 1 Whether paragraphs 191 (3) (a) and (b) apply in a particular situation. 2 Whether there is an acquisition of control of the corporation redeeming the voting shares in the particular situation.
POSITION adopted: 1 No. 2. No.
REASONS: 1 Wording of the Act. 2. The same persons would control the Corporation before and after the redemption of the voting shares.
Sylvie Labarre, CPA, CA
On December 18, 2013
Subject: Redemption of taxable preferred shares following a death
This is in response to your e-mail of 4 November 2013 in which you ask us our opinion including on the potential application of paragraphs 191 (3) a) and b) of the income tax act the income (hereinafter the “Act”) in a particular situation data.
Unless otherwise specified, all legislative references in the This are references to the provisions of the Act.
A company (hereinafter “company”) would have been incorporated under the By actions of the Québec companies act. Society would be a corporation Canadian controlled private. A few years ago, Mr. X would have performed an estate freeze of its participation in society. Mr. X would have then obtained XXXXXXXXXX actions category B of the capital stock of Corporation. These actions would not voting and non-participants. Their paid-up capital legal and tax would amount to XXXXXXXXXX $ while their redemption value would be equal to XXXXXXXXXX$. Shares of class B of the capital stock of Corporation would be taxable, as preferred shares as defined in the subsection 248 (1). No amount was stated in respect of these shares in accordance with section 191 (4).
At the time of the estate freeze, a trust (hereinafter “trust”) would subscribed to XXXXXXXXXX class A shares and XXXXXXXXXX actions category C of the capital stock of Corporation for the sum of XXXXXXXXXX $ per share. The category A shares of the capital stock of Corporation would be non-voting and participating so that shares of class C of this same capital stock would be voting and participating.
The beneficiaries of trust would be D, E and F and the Trustees of Trust would be D, F and G. D, E and F will not be linked to Mr. X but they have been linked to deceased Mr. X. g. wife would be a person not related to Mr. X and the beneficiaries of trust.
D the daughter of E. E would be the father of D and the husband of the sister of F (his brother-in-law). F would be the aunt of D. Therefore, E and F would be related persons. D and E would be also people related.
Mr. X would die. At the time of his death, the only actions of Company issued and outstanding share capital would be the actions categories A, B and C emitted during the estate freeze.
In the absence of surviving spouse and descendants, m. x would have bequeathed by Testament its class B shares of the capital stock of Corporation a testamentary trust for the benefit of D, E and F. The liquidators of the succession (hereinafter ‘ estate’) would be D, F and G.
Under the rules of Succession, the liquidators might wish to be entitled to subsection 164 (6) and, to this end, consider asking the redemption of the shares of class B of the capital stock of Corporation in order to create a capital loss that could be carried over against the gain capital included in computing the income of Mr. X in his statement final.
Before the redemption of the shares of class B of the capital stock of society, the latter would redeem the XXXXXXXXXX voting shares of category C of its capital stock held by trust. As a result of the application of article 48, paragraph 2, of the law on corporations, all the issued shares of the capital stock of Corporation would become of voting given the absence of shares specifically voting. It would result in that Succession, due to his detention to category B of the capital stock of company shares, would have sufficient voting rights to control society and be bound with it.
You would like to know if the redemption of class C shares of capital stock of Corporation would result in the application of the rules anti-avoidance rule set out in paragraphs 191 (3) a) and b), so that Estate is deemed not to have involvement in Society.
You also want to know if an acquisition of control of company occur due to the redemption of the class C shares of capital stock of Corporation.
Finally, you would like to know if the Canada Revenue Agency consider that a disposition of the shares of class A and B of capital stock of Corporation would take place because they would become voting due to the application of article 48, paragraph 2, of the Law on corporations, given the absence of issued shares specifically voting.
This technical interpretation provides general comments provisions contained in the Act and other related acts, where appropriate. It does not have as objective to confirm the tax treatment given relatively to a situation involving a taxpayer in particular, but rather help you determine this. Our direction is confirms the tax treatment relating to the data of a taxpayer in particular, as part of a request for decision advance tax income presented in the described way in circular IC 70 – 6R5, advance rulings in subject to income tax.
The deemed dividend under subsection 84 (3) arising out of the redemption taxable preferred shares could give rise to tax of the Part VI.1 unless an excluded dividend or unless you are less the exemption provided for in subsection 191.1(1) (2).
If the holder of the capital stock of a taxable preferred shares company has a significant interest in the company, the dividend will be excluded pursuant to paragraph a) of the definition “excluded dividend” in paragraph 191 (1) and will not be subject to the part VI.1 tax.
In addition to taking account of the definition of ‘significant participation ‘. in paragraph 191 (2), the holder of the taxable preferred shares redeemed should consider the potential application of the rules specific anti-avoidance rule in subsection 191 (3). If the rules described in subsection 191 (3) applied, the holder of the preferred shares taxable redeemed would be deemed not holding a important in society.
In the situation described in the present, Succession does not acquire from participation in society during the redemption of the class C shares of capital stock of Corporation. It is only by virtue of the corporate law that estate controls Corporation and not because of the acquisition of a participation. In such a situation, the only person who could be considered as acquiring participation in society would be The Company itself. In this situation, the acquisition by company. This participation would not object to subtract society to the application of part 1, IV.1 or VI.1 or to restrict tax the application in its regard. Therefore, paragraph 191 (3) (a)) do not apply to such a situation. With regard to paragraph 191 (3) (b)), company, which makes the redemption of the voting shares, cannot be regarded as holding a involvement in itself. In addition, company acquires the class C shares of its capital stock of trust which has a involvement in society just before the takeover. In addition, as mentioned above, the acquisition of class C shares the capital stock of Corporation by the latter would not object from the application of part 1, IV.1 tax company or VI.1 or restrict the application in its regard.
Therefore, paragraph 191 (3) (b)) does not apply because the conditions are not respected. Paragraph 191 (3) d) also provides that certain trusts will be considered do not have a significant interest in a corporation. There are However an exception to this general rule. This exception is described in paragraph 191 (3) d) (ii). In this situation, the persons having a right of beneficiary (D, E and F) are related to each of the other persons taking into account the presumption for purposes of this subparagraph, any person having the right of beneficiary who is the aunt or niece of another person, other, shall be deemed to be related to that other person. Therefore, paragraph 191 (3) d) do not apply to the present situation.
Furthermore, we cannot rule us permanently on the application of section 245 (2) within the framework of an interpretation technique. This situation would result in a tax benefit. From more, the redemption of shares of class C of the share capital of company appears to be an avoidance transaction. The question is therefore whether the situation would constitute an abuse within the meaning of section 245 (4).
According to the technical notes from the Ministry of finance, the part tax VI.1 refers to a situation where a taxpayer replaces funding by debt by taxable preferred shares financing. In the situation you describe, the taxable preferred shares come from a freeze on the common shares of the capital stock of Corporation whose author is Mr. X, and not replacement of debt financing. As a result, there are valid arguments to conclude that he did have no abuse within the meaning of paragraph 245 (4) and subsection 245 (2) do not apply in this hypothetical situation that does not appear be a scenario of “financing after tax. However, before conclusive as to this point, should analyze all the facts and circumstances pertaining to a particular situation.
Furthermore, we are of the opinion that there would be no acquisition of control on the redemption of shares of class C of the capital stock of Society. Indeed, the same people (D, F and G) controlling company before and after the redemption of shares of class C of the capital stock of Company since the Trustees of trust which would control society prior to the acquisition would be the same persons as the liquidators of A succession that would control company after the acquisition.
With regard to the question of a possible provision of shares of categories A and B of the capital stock of Corporation, rights of vote granted such actions does the result of a change of rights of the shares under their description to company’s articles. These voting rights result rather from the application of the Act corporate which, together with the articles of incorporation, determine the rights and restrictions relating to shares. In other words, these rights have always been inherent to all the rights and privileges the shares of categories A and B of the capital stock of Corporation.
There is no cancellation of such shares for the Replace with new actions involving new rights. Finally and as indicated above, the steps in the situation data would result in any change of control at the level of company.
Therefore, we are of the opinion that the redemption of the shares of category (C) of the capital stock of Corporation and the application of article 48, paragraph 2 of the Business Corporations Act (which makes it free) effect the restriction on the right to vote shares of categories A and B of the capital stock of Corporation issued as another emitted action does not have the right to vote), in themselves, would not result in a disposition for tax purposes of the actions of categories A and B of the capital stock of Corporation.
We hope that these comments will be helpful.
Stéphane Prud’Homme, notary, M.Fisc.
for the Director
Division of reorganizations
Income tax rulings Directorate
Legislative policy Directorate
and business regulatory