9 September 1998 External T.I. 9807595 - PRESCRIBED SHARES

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

1. Whether paragraph 6205(2)(a) of the Regulations applies so that the shares issued after two estate freezes qualify as prescribed shares.

2. Does the reference to “other shares” in subparagraph 6205(2)(a)(i) mean “all other shares” or “any other shares”?

Position:

1. Question of fact.

2. In our view, the reference to “other shares” in subparagraph 6205(2)(a)(i) does not mean “all other shares”.

Reasons:

See 971170. Paragraph 6205(2)(a) of the Regulations applies to shares issued after a second estate freeze so that these shares may qualify as prescribed shares for the purposes of subsections 110.6(8) and (9).

XXXXXXXXXX 980759
G. Moore
September 9, 1998

Dear XXXXXXXXXX:

Re: Prescribed Shares as Defined in Subsection 6205(2) of the Income Tax Regulations for the Purpose of Subsections 110.6(8)
and (9) of the Income Tax Act

This is in reply to your letter of March 26, 1998, in which you requested our comments regarding the definition of “prescribed share” in subsection 6205(2) of the Income Tax Regulations (the “Regulations”).

We understand your main concern to be whether a share in the following situation qualifies as a “prescribed share” as defined in subsection 6205(2) of the Regulations for purposes of subsections 110.6(8) and (9) of the Income Tax Act (the “Act”):

1. Preferred shares were issued in exchange for common shares in 1996 as part of an arrangement to permit any further increase in the value of the corporation to accrue to other shares that would at the time of their issue be “prescribed shares”. Following this exchange, new common shares (i.e. prescribed shares within the meaning of subsection 6205(1) of the Regulations) were issued from the treasury.

2. A second estate freeze is now being considered where the corporation will exchange the new common shares issued in (1) above for preferred shares. Following this exchange, new common shares (i.e. prescribed shares within the meaning of subsection 6205(1) of the Regulations) will again be issued from the treasury. It is your view that the preferred shares (“freeze shares”) issued in the second estate freeze will meet the definition of “prescribed shares” in subsection 6205(2) of the Regulations.

You have asked if the term “other shares” as used in subparagraph 6205(2)(a)(i) of the Regulations should be interpreted as “all other shares” or “any other shares”. It is your view that if the term “other shares” means “all other shares”, then subsequent estate freezes such as the one described above will be ineffective because the increase in value following the second estate freeze will not accrue to the initial freeze shares due to the fact that the preferred shares are fixed in value.

Our Comments

We have not been provided with the necessary information (e.g. subparagraph 6502(2)(a)(ii) of the Regulations) to enable us to comment on the application of subsection 110.6(8) of the Act and whether the shares issued in the above situation meet the definition of “prescribed share” in subsection 6205(2) of the Regulations. However, we can offer you the following general comments.

Paragraph 6205(2)(a) of the Regulations provides that, for the purposes of subsections 110.6(8) and (9) of the Act and subject to subsection 6205(3) of the Regulations, a prescribed share is a share of the capital stock of a particular corporation if, amongst other things, the main purpose of the arrangement is to permit any increase in the value of the property of the corporation to accrue to the “other shares” which would, at the time of their issue, be prescribed shares under section 6205 of the Regulations. In our view, the term “other shares” in subparagraph 6502(2)(a)(i) does not mean “all other shares”. Accordingly, preferred shares issued in a second estate freeze may qualify as “prescribed shares”.

We trust our comments will be of assistance to you. Please note that these comments represent our opinion of the law as it applies generally and, as stated in Information Circular 70-6R3, are not binding on the Department.

Yours truly,

J. Wilson
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

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